FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended July 31, 2008
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001- 04311
PALL CORPORATION
(Exact name of registrant as specified in its charter)
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New York
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11-1541330 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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2200 Northern Boulevard, East Hills, NY
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11548 |
(Address of principal executive offices)
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(Zip Code) |
(516) 484-5400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, $.10 par value
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New York Stock Exchange |
Common Share Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the
registrant, computed by reference to the closing price of a share of common stock on January 31,
2008 (the last business day of the registrants most recently completed second fiscal quarter) was
$4,516,443,478.
On September 22, 2008, there were 119,357,527 outstanding shares of the registrants common stock,
$.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants proxy statement for the 2008 annual meeting of shareholders, scheduled
to be held on November 19, 2008 (hereinafter referred to as the Proxy Statement), are
incorporated by reference into Part III of this report.
PART I
ITEM 1. BUSINESS.
GENERAL:
Pall Corporation, a New York corporation incorporated in July 1946, and its subsidiaries (the
Company) is a leading supplier of filtration, separation and purification technologies,
principally made by the Company using its engineering capability and fluid management expertise,
proprietary filter media, and other fluid clarification and separations equipment for the removal
of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.
The Company serves customers through two business groups globally: Life Sciences and
Industrial. The Life Sciences business group is focused on developing, manufacturing and selling
products to customers in the Medical and BioPharmaceuticals marketplaces. The Industrial business
group is focused on developing, manufacturing and selling products to customers in the Aerospace &
Transportation, Microelectronics and Energy, Water & Process Technologies markets. The Energy,
Water & Process Technologies market was formerly known as the General Industrial market. These
business groups are supported by shared and corporate services groups that facilitate the Companys
corporate governance and business activities globally. The transition to this business structure
began in fiscal year 2005 and was completed in the first quarter of fiscal year 2007. While there
is overlap in the intellectual property that underlies the products sold by the business groups,
Company management believes that this structure positions the Company for future profitable growth.
This business structure holistically focuses on the global marketplace presenting opportunities for
sales growth, efficiencies and cost reduction in both of the business groups, as well as in the
Companys corporate governance and shared services infrastructure, while leveraging its entire
intellectual property portfolio to the marketplaces efficiently.
With few exceptions, research and development activities conducted by the Company are Company
sponsored. Research and development expenses totaled $71,647,000 in fiscal year 2008, $62,414,000
in fiscal year 2007 and $57,371,000 in fiscal year 2006.
No one customer accounted for 10% or more of the Companys consolidated sales in fiscal years
2008, 2007 or 2006.
The Company is in substantial compliance with federal, state and local laws regulating the
discharge of materials into the environment or otherwise relating to the protection of the
environment. To date, compliance with environmental matters has not had a material effect upon the
Companys capital expenditures or competitive position. For a further description of environmental
matters in this report, see Part I Item 3 Legal Proceedings, and Note 13, Contingencies and
Commitments, to the accompanying consolidated financial statements.
At July 31, 2008, the Company employed approximately 10,600 persons.
For financial information of the Company by operating segment and geography, please see Note
17, Segment Information and Geographies, to the accompanying consolidated financial statements and
the information under the caption Review of Operating Segments in Managements Discussion and
Analysis of Financial Condition and Results of Operations (Part II Item 7 of this report).
The Companys website address is www.pall.com. The Companys reports filed with the U.S.
Securities and Exchange Commission (SEC) are also available free of charge on its website as soon
as reasonably practicable after such material is electronically filed with, or furnished to, the
SEC. The Company is subject to the informational requirements of the Securities Exchange Act of
1934 (the Exchange Act). The Company therefore files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). Such reports may be obtained by
visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by
calling the SEC at (800) SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov)
that contains reports, proxy and information statements and other information. Financial and other
information can also be accessed on the investor section of the Companys website at www.pall.com.
The Company makes available, free of charge, copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after filing such material electronically or otherwise furnishing it to the SEC. Copies of
financial and other information are also available free of charge by calling (516) 484-5400 or by
sending a request to Pall Corporation, 2200 Northern Blvd., East Hills, NY, 11548. Information on
our website is not incorporated into this Form 10-K or our other securities filings and is not a
part of them.
3
As discussed in the special note preceding Part I of the Form 10-K for the fiscal year ended
July 31, 2007 (2007 Form 10-K), on August 1, 2007, the audit committee of the Companys board of
directors, on the recommendation of management, concluded that the Companys previously issued
financial statements for each of the eight fiscal years in the period ended July 31, 2006
(including the interim periods within those years), and for each of the fiscal quarters ended
October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon.
Accordingly, the Company restated its previously issued financial statements for those periods in
the 2007 Form 10-K.
OPERATIONS:
Pall Corporation is a broad-based filtration, separation and purification company. Its
proprietary products are used to discover, develop and produce biotechnology drugs, vaccines and
safe drinking water, protect hospital patients as in the case of the Companys blood, breathing
circuit and hospital water filters, enhance the quality and efficiency of manufacturing processes,
keep equipment such as manufacturing equipment and airplanes running efficiently and to protect the
environment. Requirements for product quality, purity, environmental protection, health and safety
apply to a wide range of industries and across geographic borders. The Company has more than a
60-year history of commercializing successful products and continues to develop new materials and
technologies for its Life Sciences and Industrial customers and their increasingly difficult fluid
filtration, purification and separation challenges. The Company has an array of core materials and
technologies that can be combined and manipulated in many ways to solve complex fluid separation
challenges. These proprietary materials and technologies, coupled with the Companys ability to
engineer them into useful forms and place them into fully integrated systems, are the cornerstone
of the Companys capabilities. Proprietary materials and technologies, customer process knowledge,
and engineering know-how enable the Company to provide customers with products that are well
matched to their needs, to develop new products and to enter new markets.
The global drivers for the filtration, separation and purification market include, increasing
potable water and energy demand, emerging pathogens, environmental issues, industrial globalization
and consolidation, increasing government regulations and process innovation and optimization. These
all require more and ever finer levels of filtration, separation and purification. Opportunities to
filter water exist in every one of the Companys markets. The Company has a balanced portfolio of
products that are sold into diversified markets. The Companys strategy for growth includes
capitalizing on new markets for its products in high-growth geographies such as Asia, Eastern
Europe, the Middle East and Latin America as well as focusing on high-growth markets such as
biotechnology, cell therapy, vaccine production, micro and macroelectronics, next-generation
aircraft, energy and water. The Companys products help to meet the evolving needs of markets
worldwide.
The Company actively pursues applications in which Pall products can make a substantial
difference to its customers and especially targets projects, under the umbrella of its Total Fluid
ManagementSM (TFM) strategy, whereby it can engineer integrated filtration,
purification and separation system solutions to enhance performance and economics. The TFM strategy
leverages the Companys resources and capabilities to help its customers improve operating
efficiencies within their processes through the optimal selection and integrated use of filtration
and separation products. This approach makes use of Palls engineering and scientific expertise in
fluid management to create unique and cost-effective solutions for customers. Integrated systems
are an important part of this approach, and generally couple or automate filtration/separation
steps for greater efficiency and ease and economy of use. These systems typically include the
Companys proprietary consumable filtration products. When fully commissioned, Company management
expects these systems to provide an ongoing annuity stream for the Companys consumable filtration
products. Systems represent a growing portion of the Companys revenues. Consumable filtration
products sold are principally filters made with proprietary Pall filter media produced by chemical
film casting, melt blowing of polymer fibers, papermaking and metallurgical processes.
The Company is executing a full suite of initiatives aimed at strengthening its processes
while increasing efficiency and reducing costs. Such improvement initiatives include the facilities
rationalization program in which the Company is consolidating manufacturing, reducing its footprint
and realigning plants with its customers general locations. The Company is also executing major
initiatives to streamline processes and infrastructure.
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Competition is intense in all of the Companys markets and includes numerous large companies
and many smaller regional competitors. In many cases, the Companys primary competition comes from
alternative, often older, technologies, such as in beer production from pasteurization, as opposed
to sophisticated filtration of the kind Pall provides. The Company believes that no one competitor
overlaps in more than about 20% (based on revenues) of its business. In many markets, there are
significant barriers to entry limiting the number of qualified suppliers. These barriers result
from stringent product performance standards, product qualification protocols and requirements for
consistent levels of global service and support. The Companys broad array of patented materials
and product designs coupled with its engineering and manufacturing expertise and global reach
enable it to provide customers with differentiated product performance and value and global
customer support.
LIFE SCIENCES SEGMENT:
The Companys Life Sciences technologies facilitate the process of drug discovery, development
and production. They are used extensively in the research laboratory, pharmaceutical and
biotechnology industries, in blood centers and in hospitals at the point of patient care. The
Companys broad capability in the life sciences industry is a competitive strength and an important
element of its strategy going forward. Sales in the Medical and BioPharmaceuticals markets are made
through direct sales and distributors.
Safety, quality, efficacy, ease of use, technical support, product delivery and price are all
important considerations among the Companys Life Sciences customers. Pricing for blood filtration
products has become more of a consideration as the Companys customers have increasingly become
large centralized procurers, such as blood centers in the Western Hemisphere and nationalized blood
services in Europe and Asia. The backlog for the Life Sciences segment at July 31, 2008 was
approximately $140,285,000 (all of which is expected to be shipped in fiscal year 2009) compared
with $115,095,000 at July 31, 2007.
MEDICAL MARKET:
The Companys medical products improve the safety of blood transfusions and help control the
spread of infections in hospitals. Its broad laboratory product line is used in drug discovery,
gene manipulation and proteomics applications. Palls cell therapy product portfolio provides
efficient enabling technologies for the emerging regenerative medicine market. The Company is in
the process of developing its second generation product to remove infectious prions from donor
blood and believes that prion reduction could be a large potential long-term market opportunity.
Products related to transfusion safety represent a significant portion of Life Sciences sales.
For example, the Companys blood filters remove unwanted white blood cells from donor blood. Its
AcrodoseTM PL System enables blood centers to tap into the abundant, but often
discarded, supply of whole blood platelets. Hospital acquired infections are a growing problem for
patients and the worlds health care systems. The Companys breathing-circuit, intravenous and
point-of-use water filters help protect patients from these infections.
The backlog for the Medical market at July 31, 2008 was approximately $45,390,000 (all of
which is expected to be shipped in fiscal year 2009) compared with $29,158,000 at July 31, 2007.
The Companys principal competitors in the Medical market include Fenwal, Inc., MacoPharma Group,
Fresenius Medical Care AG & Co., Millipore Corporation, GE Healthcare (a unit of General Electric
Company (GE)), Tyco International Ltd., Teleflex Incorporated, Terumo Medical Corporation, and
Capital Health Inc.
BIOPHARMACEUTICALS MARKET:
The Company sells separation systems and disposable filtration and purification technologies
primarily to pharmaceutical and biotechnology companies for use by them in the development and
commercialization of chemically synthesized and biologically derived drugs and vaccines. The
Company provides a broad range of advanced filtration solutions for each critical stage of drug
development through drug production. Its filtration systems and validation services assist drug
manufacturers through the regulatory process and on to the market.
The fastest growing part of the market is the biotechnology industry. Biotechnology drugs and
biologically derived vaccines are very filtration and purification intensive. One of the factors
driving Palls growth is increasing adoption of single-use processing systems to produce drugs.
Pall has supplied single-use technologies for many years including self-contained filter capsules
as an alternative to stainless steel. There are many advantages to Palls AllegroTM
single-use disposable systems, including more flexible use of space to speed in setting up a new
production line. Critical to the industry, they also can greatly reduce or eliminate the need for
cleaning and cleaning validation and reduce the risk of cross-contamination between batches and
products.
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Company management believes that the Companys established record of product performance and
innovation, as well as its ability to sell and globally support a complete range of products,
including its engineered systems, give it a strong competitive advantage among BioPharmaceutical
customers because of the high costs and safety risks associated with drug development and
production. The backlog for the BioPharmaceuticals market at July 31, 2008 was approximately
$94,895,000 (all of which is expected to be shipped in fiscal year 2009) compared with $85,937,000
at July 31, 2007. Principal competitors in the BioPharmaceuticals market include Millipore
Corporation, The Sartorius Group, CUNO (a 3M company) and GE Healthcare.
INDUSTRIAL SEGMENT:
The Company provides enabling and process enhancing technologies throughout the industrial
marketplace. This includes the aerospace, microelectronics and consumer electronics, municipal and
industrial water, fuels, chemicals, energy, and food and beverage markets. The Company has the
capability to provide customers with integrated solutions for their process fluids. The backlog for
the Industrial segment at July 31, 2008 was approximately $476,153,000 (of which approximately
$410,300,000 is expected to be shipped in fiscal year 2009) compared with $456,045,000 at July 31,
2007.
ENERGY, WATER & PROCESS TECHNOLOGIES MARKET (formerly General Industrial):
Included in this diverse market are sales of filters, coalescers and integrated separation
systems for hydraulic, fuel and lubrication systems on mechanical equipment to many industries, as
well as to producers of energy (i.e., oil, gas, renewable and alternative fuels, electricity and
chemicals), food and beverages, municipal and industrial water. Virtually all of the raw materials,
process fluids and waste streams that course through industry are candidates for multiple stages of
filtration, separation and purification. The growing demand for clean and green technology and
increasing demand for water and energy also create growth opportunities for the Company.
Technologies that purify water for use and reuse represent an important opportunity.
Governments around the world are implementing stringent new regulations governing drinking water
standards and Company management believes that the Companys filters and systems provide a solution
for these requirements. These standards apply to municipal water supplies throughout the United
States and in a growing number of countries. Industry, which consumes enormous quantities of water,
also increasingly needs to filter water before, during and after use both to conserve it and to
ensure it meets discharge requirements.
Within the energy market, demand is strong as oil and gas producers, refineries and power
generating stations work to increase production, produce cleaner burning fuels, conserve water,
meet environmental regulations and develop alternative fuel sources. Each of these applications
provides opportunities for Pall.
Within the Food & Beverage market, filtration solutions are provided to the wine, beer, soft
drink, bottled water and food ingredient markets. A growing filtration opportunity in this market
is the need of wine and beer manufacturers to eliminate the use of diatomaceous earth, a health
concern, in their processes.
The backlog at July 31, 2008 was approximately $290,931,000 (of which approximately
$255,800,000 is expected to be shipped in fiscal year 2009) compared with $279,044,000 at July 31,
2007. Sales to Energy, Water & Process Technologies customers are made through Company personnel,
distributors and manufacturers representatives. The Company believes that its TFM strategy and
ability to engineer fully integrated systems solutions, underscored by product performance and
quality, service to the customer, and price, are the principal competitive factors in this market.
The Companys principal competitors in the Energy, Water & Process Technologies market include CUNO
(a 3M company), GE Infrastructure (a unit of GE), U.S. Filter (a Siemens business), The Sartorius
Group, Parker Hannifin Corporation and Rohm and Haas Company.
AEROSPACE & TRANSPORTATION MARKET:
The Company sells filtration and fluid monitoring equipment to the aerospace industry for use
on commercial and military aircraft, ships and land-based military vehicles to help protect
critical systems and components. Commercial, Military and Industrial OEM sales represented 34%, 41%
and 25%, respectively, of total Aerospace & Transportation sales in fiscal year 2008. Key growth
drivers in this market include passenger air miles flown, military budgets, new military and
commercial aircraft, and demand for new aircraft and mobile construction equipment in emerging
geographic markets, particularly in Asia. Increasing environmental regulation faced by the
Companys customers, as well as customer requirements for improved equipment reliability and fuel
efficiency, are also driving growth.
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The Companys products are sold to customers in this segment through a combination of direct
sales to airframe manufacturers and other customers, including the U.S. military, and through the
Companys distribution partner, Satair A/S (Satair), for the commercial aerospace aftermarket,
such as sales to commercial airlines. The backlog at July 31, 2008 was approximately $160,792,000
(of which approximately $131,600,000 is expected to be shipped in fiscal year 2009) compared with
$146,464,000 at July 31, 2007. Competition varies by product. The Companys principal competitors
in the Aerospace & Transportation markets include Donaldson Company, Inc., ESCO Technologies Inc.
and CLARCOR Inc.
Company management believes that efficacy, performance and quality of product and service, as
well as price, are determinative in most sales.
MICROELECTRONICS MARKET:
The Company sells highly sophisticated filtration and purification technologies for the
semiconductor, data storage, fiber optic, advanced display and materials markets. The Company
provides a comprehensive suite of contamination control solutions for chemical, gas, water,
chemical mechanical polishing and photolithography processes to meet the needs of this demanding
industry. Integrated circuits, which control almost every device or machine in use today, require
exceedingly high levels of filtration technologies, which Pall provides. While this part of the
market is cyclical, Pall has strategically diversified into the consumer electronics market to
lessen the impact of the industrys cycles. This strategic diversification into the
macroelectronics side of the market is enabling the Company to capitalize on demand for computer
gaming consoles, MP3 players, flat screen TVs and monitors, multimedia cell phones and ink jet
printers and cartridges. These markets are typically less cyclical and just as filtration
intensive. A newer application served by Microelectronics is the growing production of solar cells.
The Companys products are sold to customers in this market through its own personnel,
distributors and manufacturers representatives. The backlog at July 31, 2008 was approximately
$24,430,000 (of which approximately $22,900,000 is expected to be shipped in fiscal year 2009)
compared with $30,537,000 at July 31, 2007. Company management believes that performance, product
quality, innovation and service are the most important factors in the majority of sales in this
market. The Companys principal competitors of the Companys Microelectronics technologies market
include Entegris, Inc. and Mott Corporation.
The following comments relate to the two operating segments discussed above:
RAW MATERIALS:
Most raw materials used by the Company are available from multiple sources. A limited number
of materials are proprietary products of major chemical companies. Management believes that the
Company could obtain satisfactory substitutes for these materials should they become unavailable.
PATENTS:
The Company owns a broad range of patents covering its filter media, filter designs and other
products, but it considers these to be mainly defensive, and its operations rely principally on its
proprietary manufacturing methods and engineering skills.
7
ITEM 1A. RISK FACTORS.
The risk factors described below are not inclusive of all risk factors but highlight those that the
Company believes are the most significant and that could impact its performance and financial
results. These risk factors should be considered together with all other information presented in
this Form 10-K report.
Litigation and regulatory inquiries associated with the restatement of the Companys prior period
financial statements could result in substantial costs, penalties and other adverse effects.
Substantial costs may be incurred to defend and resolve regulatory proceedings and litigation
arising out of or relating to matters underlying our recent restatement of prior period financial
statements. These proceedings include the ongoing audits in process of the Companys tax returns,
as well as audits expected to commence of the Companys tax returns for some of the periods
affected by the restatement. In September 2007, the Company deposited $135 million with the U.S.
Treasury, which reflected managements preliminary assessment of additional taxes and interest that
the Company might owe the Internal Revenue Service (IRS) for prior years as a result of tax
compliance matters identified at the time and did not include any amount with respect to potential
penalties. In completing the restatement, the Company examined the appropriateness of the Companys
accounting treatment of the tax consequences of each type of intercompany transaction in the
various taxing jurisdictions in which the Company operates. As a result of this analysis, the
Company determined that additional financial statement reserves were required with respect to
certain other lesser tax compliance matters. The Company cannot predict when the ongoing IRS audit
will be completed or the amount or timing of the final resolution with the IRS or other relevant
taxing authorities of the matters that gave rise to the restatement, including the amount of any
penalties that may be imposed, which could be substantial.
The Company is also subject to other regulatory and litigation proceedings relating to, or
arising out of, the restatement, including pending investigations by the SEC and the Department of
Justice, purported securities class action lawsuits and derivative lawsuits seeking relief against
certain of the Companys officers and directors. These proceedings could also result in civil or
criminal fines and other non-monetary penalties. The Company has not reserved any amount in respect
of these matters in its consolidated financial statements.
The Company cannot predict whether any monetary losses it experiences in the proceedings will
be covered by insurance or whether insurance proceeds recovered will be sufficient to offset such
losses. Pending civil, regulatory and criminal proceedings may also divert the efforts and
attention of the Companys management from business operations, particularly if adverse
developments are experienced in any of them, such as an expansion of the investigations being
conducted by the SEC and the Department of Justice. See Part I Item 3 Legal Proceedings, for
further discussion of these pending matters.
Changes in the Companys effective tax rate may affect operating results.
Fluctuations in the Companys effective tax rate may affect operating results. The Companys
effective tax rate is subject to fluctuation based on a variety of factors, such as:
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the geographical mix of income derived from the countries in which it operates; |
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currently applicable tax rates, including particularly in the United States; |
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the nature, timing and impact of permanent or temporary changes in tax laws or
regulations, including the termination or extension of provisions under U.S. federal income
tax law that are or may become subject to sunset, such as research and development
credits and incentives related to U.S. domestic production; |
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the timing and amount of the Companys repatriation of foreign earnings; |
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the timing and nature of the Companys resolution of uncertain income tax positions; and |
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the Companys success in managing its effective tax rate through the implementation of
global tax and cash management strategies. |
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The Company operates in numerous countries and is subject to taxation in all of the countries
in which it operates. The tax rules and regulations in such countries can be complex and, in many
cases, uncertain in their application. In addition to challenges to the Companys tax positions
arising during routine audits, disputes can arise with the taxing authorities over the
interpretation or application of certain rules to the Companys business conducted within the
country involved and with respect to intercompany transactions when the parties are taxed in
different jurisdictions. Pending proceedings to which the Company is subject include ongoing audits
of the Companys tax returns for some of the periods affected by the restatement, and the Company
cannot predict the timing or outcome of the completion of those audits, which could result in the
imposition of additional taxes and substantial penalties. See Litigation and regulatory inquiries
associated with the restatement of the Companys prior period financial statements could result in
substantial costs, penalties and other adverse effects.
Changes in product mix and product pricing may affect the Companys operating results particularly
with the expansion of the systems business, in which the Company experiences significantly longer
sales cycles with less predictable revenue and no certainty of future revenue streams from related
consumable product offerings and services.
The Companys TFM strategy is partially reliant on sales of integrated systems. Because
systems are generally sold at lower gross margins than many other products, gross margins could
decline if systems sales continue to grow as a percentage of total sales and the anticipated future
revenue streams from related consumable product offerings and services are not realized.
The Companys systems platform generally also experiences significantly longer sales cycles
and involves less predictable revenue and uncertainty of future revenue streams from related
consumable product offerings and services. In addition, the profitability of the Companys systems
sales depends substantially on the ability of management to estimate accurately the costs involved
in manufacturing and implementing the relevant system according to the customers specifications.
Company estimates can be adversely affected by disruptions in a customers plans or operations and
unforeseen events, such as manufacturing defects. Failure to accurately estimate the Companys cost
of system sales can adversely affect the profitability of those sales, and the Company may not be
able to recover lost profits through pricing or other actions.
Increases in costs of manufacturing and operating costs may affect operating results.
The Companys costs are subject to fluctuations, particularly due to changes in commodity
prices, raw materials, energy and related utilities and cost of labor. The achievement of the
Companys financial objectives is reliant on its ability to manage these fluctuations through cost
savings or recovery actions and efficiency initiatives.
The Company may not be able to achieve the savings anticipated from its cost reduction and margin
improvement initiatives, including the timing of completion of its facilities rationalization
initiative.
In fiscal year 2006, the Company began an extensive program to restructure manufacturing
operations, including the closing of up to 12 facilities around the globe. One of the purposes of
this initiative is to reduce manufacturing costs and improve gross margins. Unexpected delays or
other factors in the facilities rationalization initiative and other cost reduction initiatives
could impact the Companys ability to realize the anticipated savings and to improve or maintain
gross margins.
Fluctuations in foreign currency exchange rates and interest rates may affect operating results.
In fiscal year 2008, the Company derived 71% of sales from outside the United States. Sales
outside the United States are typically made in the local currencies of those countries. The
primary foreign currency exposures relate to adverse changes in the relationships of the U.S.
dollar to the British Pound, the Euro, the Japanese Yen, Swiss Franc, the Australian Dollar, the
Canadian Dollar and the Singapore Dollar, as well as adverse changes in the relationship of the
Pound to the Euro. As a result, fluctuations in currency exchange rates may affect operating
results. Giving effect to the Companys interest rate swap, the Companys debt portfolio was approximately 50%
variable rate at July 31, 2008. Fluctuations in interest rates may affect operating results.
The Company may not be able to obtain regulatory approval or market acceptance of new technologies.
Part of the Companys planned growth is dependent on new products and technologies. Some of
those new products may require regulatory approval. Growth from those new technologies may not be
realized if regulatory approval is not granted or customer demand for those products or
technologies does not materialize.
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Changes in demand for the Companys products and business relationships with key customers and
suppliers, including delays or cancellations in shipments, may affect operating results.
To achieve its objectives, the Company must develop and sell products that are subject to the
demands of customers. This is dependent on many factors including, but not limited to, managing and
maintaining relationships with key customers, responding to the rapid pace of technological change
and obsolescence, which may require increased investment by or greater pressure to commercialize
developments rapidly or at prices that may not fully recover the associated investment, and the
effect on demand resulting from customers research, development and capital expenditure plans.
The manufacturing of the Companys products is dependent on an adequate supply of raw
materials. The Companys ability to maintain an adequate supply of raw materials could be impacted
by the availability and price of those raw materials and maintaining relationships with key
suppliers.
The Company may not successfully enforce patents and protect proprietary products and manufacturing
techniques.
Some of the Companys products, as well as some competitors products, are based on patented
technology and other intellectual property rights. Some of these patented technologies and
intellectual property require substantial resources to develop. Operating results may be affected
by the costs associated with the Companys defense of its intellectual property against
unauthorized use by others, as well as third-party challenges to its intellectual property. The
Company could also experience disruptions in its business, including loss of revenues and adverse
effects on its prospects, if its patented or other proprietary technologies are successfully
challenged.
The Company may not be able to successfully complete or integrate acquisitions.
In so far as acquisition opportunities are identified, there is no assurance of the Companys
ability to complete any such transactions and successfully integrate the acquired business as
planned.
The Company is subject to domestic and international competition in all of its global markets.
The Company is subject to competition in all of the global markets in which it operates. The
Companys achievement of its objectives is reliant on its ability to successfully respond to many
competitive factors including, but not limited to, pricing, technological innovations, product
quality, customer service, manufacturing capabilities and hiring and retention of qualified
personnel.
The Company may be impacted by global and regional economic conditions and legislative, regulatory
and political developments.
The Company conducts operations around the globe. The Company expects to continue to derive a
substantial portion of sales and earnings from outside the United States. A recession in the United
States could have a negative impact on demand for the Companys products not only in the United
States, but also globally. Sales and earnings could also be affected by the Companys ability to
manage the risks and uncertainties associated with the application of local legal requirements or
the enforceability of laws and contractual obligations, trade protection measures, changes in tax
laws, regional political instability, war, terrorist activities, severe or prolonged adverse
weather conditions and natural disasters as well as health epidemics or pandemics.
The Company may be adversely affected by the current economic environment
As a result of the credit market crisis (including uncertainties with respect to financial
institutions and the global capital markets), increases in energy costs and other macro-economic
challenges currently affecting the economy of the United States and other parts of the world,
customers or vendors may experience serious cash flow problems and as a result, may modify, delay
or cancel plans to purchase the Companys products and vendors may significantly and quickly
increase their prices or reduce their output. Additionally, if customers are not successful in
generating sufficient revenue or are precluded from securing financing, they may not be able to
pay, or may delay payment of, accounts receivable that are owed to the Company. Any inability of
current and/or potential customers to pay the Company for its products may adversely affect the
Companys earnings and cash flow. If economic conditions in the United States and other key markets
deteriorate further or do not show improvement, the Company may experience material adverse impacts
to its business and operating results.
10
If the Company experiences a disruption of its information technology systems, or if the Company
fails to successfully implement, continue to manage and integrate its information technology
systems, it could harm the Companys business.
The Companys information technology (IT) systems are an integral part of its business. A
serious disruption of its IT systems, whether caused by fire, storm, flood, telecommunications
failures, physical or software break-ins or viruses, or any other events, could have a material
adverse effect on the Companys business and results of operations. The Company depends on its IT
systems to: process customer orders and invoices, provide customer service, collect accounts
receivable, purchase products from its suppliers, manage inventory, and consolidate these and other
transactions for its financial reporting and monitoring mechanisms. The Company cannot provide
assurance that its contingency plans will allow it to operate at its current level of efficiency in
the event of a serious IT disruption.
Additionally, the Companys ability to most effectively implement its business plans in a
rapidly evolving market requires effective planning, reporting and analytical processes and
systems. The Company expects that it will need to continue to improve and further integrate its IT
systems, reporting systems and operating procedures on an ongoing basis. If the Company fails to
incrementally improve, manage and integrate its IT systems, reporting systems and operating
procedures, it could adversely affect the Companys ability to achieve its objectives.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
11
ITEM 2. PROPERTIES.
The following are the Companys principal facilities (i.e., facilities with square footage in
excess of 25,000 square feet), which in the opinion of management are suitable and adequate to meet
the Companys requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principally Supports |
|
|
|
|
|
|
the Following |
|
Fiscal Year 2008 |
Location |
|
Principal Activities (1) |
|
Business Groups (2) |
|
Square Footage |
OWNED: |
|
|
|
|
|
|
|
|
Western Hemisphere |
|
|
|
|
|
|
|
|
Cortland, NY
|
|
A
|
|
PI
|
|
|
338,000 |
|
DeLand, FL
|
|
M
|
|
PI
|
|
|
279,000 |
|
Fajardo & Luquillo, Puerto Rico
|
|
M,W
|
|
PLS
|
|
|
261,000 |
|
Pt. Washington, NY
|
|
L,S
|
|
A
|
|
|
239,000 |
|
Ann Arbor, MI
|
|
A
|
|
PLS
|
|
|
186,000 |
|
New Port Richey, FL
|
|
A
|
|
PI
|
|
|
179,000 |
|
Timonium, MD
|
|
M,W,S
|
|
PI
|
|
|
160,000 |
|
Ft. Myers, FL
|
|
A
|
|
PI
|
|
|
111,000 |
|
Pensacola, FL
|
|
A
|
|
PLS
|
|
|
98,000 |
|
Hauppauge, NY
|
|
M
|
|
PLS
|
|
|
75,000 |
|
Covina, CA
|
|
M,L
|
|
PLS
|
|
|
71,000 |
|
Putnam, CT
|
|
M
|
|
PI
|
|
|
63,000 |
|
Europe |
|
|
|
|
|
|
|
|
Bad Kreuznach, Germany
|
|
A
|
|
PI
|
|
|
390,000 |
|
Portsmouth, U.K.
|
|
A
|
|
A
|
|
|
270,000 |
|
Crailsheim, Germany
|
|
A
|
|
PI
|
|
|
215,000 |
|
Ascoli, Buccinasco & Verona, Italy
|
|
A
|
|
A
|
|
|
189,000 |
|
Tipperary, Ireland
|
|
M
|
|
PI
|
|
|
178,000 |
|
Redruth, U.K.
|
|
M
|
|
PI
|
|
|
163,000 |
|
Ilfracombe, U.K.
|
|
M
|
|
PLS
|
|
|
125,000 |
|
Newquay, U.K.
|
|
M
|
|
PLS
|
|
|
110,000 |
|
Bazet, France
|
|
A
|
|
PI
|
|
|
96,000 |
|
Frankfurt, Germany
|
|
W,S
|
|
A
|
|
|
75,000 |
|
Saint Germain, France
|
|
L,W,S
|
|
A
|
|
|
60,000 |
|
Ternay, France
|
|
A
|
|
PI
|
|
|
33,000 |
|
Asia |
|
|
|
|
|
|
|
|
Tsukuba, Japan
|
|
M,L,W
|
|
PI
|
|
|
122,000 |
|
LEASED: |
|
|
|
|
|
|
|
|
Western Hemisphere |
|
|
|
|
|
|
|
|
East Hills, NY
|
|
A
|
|
A
|
|
|
320,000 |
|
Cortland, NY
|
|
M,W
|
|
PI
|
|
|
111,000 |
|
Timonium, MD
|
|
M,W
|
|
PI
|
|
|
71,000 |
|
Baltimore, MD
|
|
W
|
|
PI
|
|
|
41,000 |
|
Covina, CA
|
|
W
|
|
PLS
|
|
|
40,000 |
|
Northborough, MA
|
|
M,W
|
|
A
|
|
|
38,000 |
|
Humacao, Puerto Rico
|
|
W
|
|
PLS
|
|
|
34,000 |
|
San Diego, CA
|
|
A
|
|
PI
|
|
|
26,000 |
|
Europe |
|
|
|
|
|
|
|
|
Johannesburg, South Africa
|
|
W,S
|
|
PI
|
|
|
99,000 |
|
Madrid, Spain
|
|
L,W,S
|
|
A
|
|
|
44,000 |
|
Cergy, France
|
|
A
|
|
PLS
|
|
|
43,000 |
|
Ascoli, Italy
|
|
W
|
|
PLS
|
|
|
35,000 |
|
Asia |
|
|
|
|
|
|
|
|
Beijing, China
|
|
M,W,S
|
|
PI
|
|
|
314,000 |
|
Melbourne & Somersby, Australia
|
|
A
|
|
A
|
|
|
102,000 |
|
Mumbai, Banglore, Pune & Bhiwandi, India
|
|
L,W,S
|
|
A
|
|
|
80,000 |
|
Tokyo, Osaka & Nagoya, Japan
|
|
L,S
|
|
A
|
|
|
47,000 |
|
12
(1) Definition of Principal Activities
M: Manufacturing activities
L: Laboratories for research & development and validation activities
W: Warehousing activities
S: Sales, marketing and administrative activities
A: All of the above
(2) Definition of Business Groups
PLS: Pall Life Sciences
PI: Pall Industrial
CS: Corporate and Shared Services
A: All of the above
ITEM 3. LEGAL PROCEEDINGS.
Federal Securities Class Actions:
Four putative class action lawsuits were filed against the Company and certain members of its
management team alleging violations of the federal securities laws relating to the Companys
understatement of certain of its U.S. income tax payments and of its provision for income taxes in
certain prior periods as described in Note 2, Audit Committee Inquiry and Restatement to the
consolidated financial statements included in the 2007 Form 10-K. These lawsuits were filed between
August 14, 2007 and October 11, 2007 in the United States District Court for the Eastern District
of New York. By Order dated May 28, 2008, the Court consolidated the cases under the caption In re
Pall Corp, No. 07-CV-3359 (E.D.N.Y.) (JS) (ARL), appointed a lead plaintiff and ordered that the
lead plaintiff file a consolidated amended complaint. The lead plaintiff filed its consolidated
amended complaint on August 4, 2008. The lead plaintiff seeks to act as representative for a class
consisting of purchasers of the Companys stock between April 20, 2007, and August 2, 2007,
inclusive. The consolidated amended complaint names the Company, Eric Krasnoff and Lisa McDermott
as defendants and alleges violations of Section 10(b) and 20(a) of the Exchange Act, as amended,
and Rule 10b-5 promulgated by the Securities and Exchange Commission. It alleges that the
defendants violated these provisions of the federal securities laws by issuing materially false and
misleading public statements about the Companys financial results and financial statements,
including the Companys income tax liability, effective tax rate, internal controls and accounting
practices. The plaintiffs seek unspecified compensatory damages, costs and expenses. The Company
moved to dismiss the consolidated amended complaint on September 19, 2008.
Shareholder Derivative Lawsuits:
On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme
Court, Nassau County relating to the tax matter described above. These actions purport to bring
claims on behalf of the Company based on allegations that certain current and former directors and
officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform
themselves about the Companys internal controls and financial reporting systems and procedures. In
addition, plaintiffs allege that certain officers of the Company were unjustly enriched as a result
of the Companys inaccurate financial results over fiscal years 1999-2006 and the first three
quarters of fiscal year 2007. The complaints seek unspecified compensatory damages on behalf of
Pall Corporation, disgorgement of defendants salaries, bonuses, stock grants and stock options,
equitable relief and costs and expenses. The Company, acting in its capacity as nominal defendant,
moved to dismiss the complaints for failure to make a demand upon the Companys board of directors,
which motions were granted on April 30 and May 2, 2008. On September 19, 2008, the same two plaintiffs filed a derivative lawsuit in New York Supreme
Court, Nassau County, which was served on the Company on September 26, 2008. This action purports
to bring claims on behalf of the Company based on allegations that certain current and former
directors and officers of the Company breached their fiduciary duties and were unjustly enriched in
connection with the tax matter. In addition, the plaintiffs allege that the Boards refusal of
their demand to commence an action against the defendants was not made in good faith.
Another shareholder derivative lawsuit relating to the tax matter described above was filed in
the United States District Court for the Eastern District of New York on January 10, 2008. This
action purports to bring claims on behalf of the Company based on allegations that certain of the
current directors of the Company breached their fiduciary duties and were unjustly enriched in
connection with the tax matter described above. The complaint seeks unspecified compensatory
damages on behalf of Pall Corporation, disgorgement of defendants profits, benefits and other
compensation, equitable and non-monetary relief, and costs and expenses. The Company, acting in its
capacity as nominal defendant, moved to dismiss the complaint for lack of subject matter
jurisdiction over the complaint. On May 23, 2008, the plaintiff filed a notice of voluntary
dismissal without prejudice, which was subsequently granted by the Court.
Other Proceedings:
The SEC and U.S. Attorneys Office for the Eastern District of New York are conducting
investigations in connection with the tax matter described above. The Company is cooperating with
these investigations.
13
Environmental Matters:
The Company has environmental matters, discussed below, at the following four U.S. sites: Ann
Arbor, Michigan; Pinellas Park, Florida; Glen Cove, New York and Hauppauge, New York.
The Companys balance sheet at July 31, 2008 contains environmental liabilities of
$14,749,000, which relate to the items discussed below. In the opinion of Company management, the
Company is in substantial compliance with applicable environmental laws and regulatory orders and
its accruals for environmental remediation are adequate at this time.
Reference is also made to Note 13, Contingencies and Commitments, to the accompanying
consolidated financial statements.
Ann Arbor, Michigan:
In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (the
Court) by the State of Michigan (the State) against Gelman Sciences Inc. (Gelman), a
subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to
investigate and remediate contamination near Gelmans Ann Arbor facility and requested
reimbursement of costs the State had expended in investigating the contamination, which the State
alleged was caused by Gelmans disposal of waste water from its manufacturing process. Pursuant to
a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and
October 1999) (the Consent Judgment), which resolved that litigation, Gelman is remediating the
contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General
filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900,000 in
stipulated penalties for the alleged violations of the Consent Judgment and additional injunctive
relief. Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court
took the matter of penalties under advisement. The Court issued a Remediation Enforcement Order
(the REO) requiring Gelman to submit and implement a detailed plan that will reduce the
contamination to acceptable levels within five years. Gelmans plan has been approved by both the
Court and the State. Although groundwater concentrations remain above acceptable levels in much of
the affected area, the Court has expressed its satisfaction with Gelmans progress during hearings
both before and after the five-year period expired. Neither the State nor the Court has sought or
suggested that Gelman should be penalized based on the continued presence of groundwater
contamination at the site.
In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing
how it intends to address an area of groundwater contamination not addressed by the previously
approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted
its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court
issued its Order and Opinion Regarding Remediation and Contamination of the Unit E Aquifer (the
Order) to address an area of groundwater contamination not addressed in the previously approved
plan. Gelman is now in the process of implementing the requirements of the Order.
In correspondence dated June 5, 2001, the State asserted that stipulated penalties in the
amount of $142,000 were owed for a separate alleged violation of the Consent Judgment. The Court
found that a substantial basis for Gelmans position existed and again took the States request
under advisement, pending the results of certain groundwater monitoring data. That data has been
submitted to the Court, but no ruling has been issued.
On August 9, 2001, the State made a written demand for reimbursement of $227,000 it has
allegedly incurred for groundwater monitoring. On October 23, 2006, the State made another written
demand for reimbursement of these costs, which now total $494,000, with interest. In February 2007,
the Company met with the State to discuss whether the State would be interested in a proposal for a
global settlement to include, among other matters, the claim for past monitoring costs
($494,000). Gelman is engaged in discussion with the State with regard to this demand, however,
Gelman considers this claim barred by the Consent Judgment.
14
By letter dated June 15, 2007, the Michigan Department of Environmental Quality (DEQ)
claimed Gelman was in violation of the Consent Judgment and related work plans due to its failure
to operate a groundwater extraction well in the Evergreen Subdivision at the approved minimum purge
rate. The DEQ sought to assess stipulated penalties. Gelman filed a Petition for Dispute Resolution
with the court on July 6, 2007 contesting these penalties. Prior to the hearing on Gelmans
petition, the parties met and the DEQ agreed to waive these penalties in exchange for Gelmans
agreement to perform additional investigations in the area. The Court entered a Stipulated Order to
this effect on August 7, 2007. Since then, Gelman has installed several monitoring wells requested
by the State. Representatives of Gelman and the State met on December 10, 2007 to discuss the data
obtained from these wells and to plan further investigative activities. These discussions are
ongoing. On April 15, 2008, Gelman submitted two reports summarizing the results of the
investigation to date. Gelman also submitted a capture zone analysis that confirmed that Gelman
was achieving the cleanup objective for the Evergreen Subdivision system. On June 23, 2008, the
State provided its response to these reports. The response also addressed outstanding issues
regarding several other areas of the site. In its response, the State asked the Company to
undertake additional investigation in the Evergreen Subdivision area and in other areas of the site
to more fully delineate the extent of contamination. The State also asked the Company to capture
additional contaminated groundwater in the Wagner Road area, near the Gelman property, unless the
Company can show that it is not feasible to do so. Gelman proposed to the DEQ several modifications
to the Consent Judgment on August 1, 2008 and met with the DEQ to discuss these modifications (and
other outstanding issues) on September 15, 2008. The parties agreed that Gelman would prepare and
submit to the DEQ an outline for modifications to the existing Consent Judgment (and Administrative
Orders) by October 15, 2008 and that the parties would meet thereafter to discuss.
Pinellas Park, Florida:
In 1995, as part of a facility closure, an environmental site assessment was conducted to
evaluate potential soil and groundwater impacts from chemicals that may have been used at the
Companys Pinellas Park facility during the previous 24-year period of manufacturing and testing
operations. Methyl Isobutyl Ketone (MIBK) concentrations in groundwater were found to be higher
than regulatory levels. Soil excavation was conducted in 1998 and subsequent groundwater sampling
showed MIBK concentrations below the regulatory level.
In October 2000, environmental consultants for a prospective buyer of the property found
groundwater contamination at the Companys property. In October 2001, a Site Assessment Report
conducted by the Companys consultants, which detailed contamination concentrations and
distributions, was submitted to the Florida Department of Environmental Protection (FDEP).
In July 2002, a Supplemental Contamination Assessment Plan and an Interim Remedial Action Plan
(IRAP) were prepared by the Companys consultants and submitted to the FDEP. A revised IRAP was
submitted by the Company in December 2003, and it was accepted by the FDEP in January 2004. A
Remedial Action Plan (RAP) was submitted by the Company to the FDEP in June 2004. Final approval
by the FDEP of the Companys RAP was received by the Company on August 26, 2006. Pursuant to the
approved RAP, the Company began active remediation on the property.
On March 31, 2006, the FDEP requested that the Company investigate potential off-site
migration of contaminants. Off-site contamination was identified and the FDEP was notified. On
April 13, 2007, the FDEP reclassified the previously approved RAP as an Interim Source Removal Plan
(ISRP) because a RAP can only be submitted after all contamination is defined.
Pursuant to FDEP requirements, the Company installed additional on-site and off-site
monitoring wells during 2006, 2007 and 2008. Groundwater analytical results have been provided to
FDEP. Once the delineation has been declared complete by FDEP, the Company will complete and submit
a Site Assessment Report Addendum, summarizing the soil and groundwater contamination, delineation
and remediation.
Active remediation through the fourth quarter of fiscal year 2008 was performed in accordance
with work defined in the ISRP and addenda approved by FDEP. Additional remediation may be required
to satisfy site closure requirements, which include (1) no free product contaminants, (2) shrinking
or stable plumes, and (3) prevention of future exposure of the public or environment through
recordation of restrictive covenants prohibiting groundwater use. The first two requirements will
be demonstrated through groundwater monitoring; a local law firm is preparing restrictive covenants
and assisting Pall management during preliminary discussions with the owners of adjacent
properties.
Once the contamination has been delineated and active remediation has stopped, groundwater
sampling and analysis must continue for at least the legislative minimum of one year. After
groundwater sampling is complete, a closure application will be submitted to FDEP.
15
Glen Cove, New York:
A March 1994 report indicated groundwater contamination consisting of chlorinated solvents at
a neighboring site to the Companys Glen Cove facility, and later reports found groundwater
contamination in both the shallow and intermediate zones at the facility. In 1999, the Company
entered into an Order on Consent with the New York State Department of Environmental Conservation
(NYSDEC), and completed a Phase II Remedial Investigation at the Glen Cove facility.
The NYSDEC has designated two operable units (OUs) associated with the Glen Cove facility.
In March 2004, the NYSDEC finalized the Record of Decision (ROD) for the shallow and intermediate
groundwater zones, termed OU-1. The Company signed an Order on Consent for OU-1 effective July 5,
2004, which requires the Company to prepare a Remedial Design/Remedial Action (RD/RA) Work Plan
to address groundwater conditions at the Glen Cove facility.
The Company completed a pilot test involving the injection of a chemical oxidant into on-site
groundwater and, on May 31, 2006, submitted a report to NYSDEC entitled In-Situ Chemical Oxidation
Phase II Pilot Test and Source Evaluation Report (the Report). The Report contained data which
demonstrated that (1) in general, the pilot test successfully reduced contaminant levels and (2)
the hydraulic controls installed on the upgradient Photocircuits Corporation (Photocircuits) site
are not effective and contaminated groundwater continues to migrate from that site. On July 31,
2006, the Company received comments from NYSDEC on the Report. On September 27, 2006, the Company
submitted responses to the NYSDEC comments. On November 16, 2006, the Company met with the NYSDEC
representatives to discuss the Report and the impact of the continued migration of contaminated
groundwater from the upgradient Photocircuits site onto the Glen Cove facility. On January 26,
2007, the Company submitted a draft conceptual remedial design document for the Glen Cove facility
to NYSDEC for its technical review.
The Company met with NYSDEC representatives on April 12, 2007 to discuss a possible settlement
of liability for OU-1 and for the contamination in the deep groundwater zone, termed OU-2. NYSDEC
would not agree to settle OU-2 because a remedial investigation has not been completed. On October
23, 2007, NYSDEC requested submittal of a RD/RA Work Plan, which the Company submitted on December
20, 2007. The Company has pursued possible settlement of liability for OU-1 and met with NYSDEC
again on November 30, 2007 to present a settlement framework. On December 20, 2007, the Company
submitted a description of the settlement framework for NYSDECs further review. On April 15, 2008,
the Company met with NYSDEC staff to discuss settlement terms and reached conceptual agreement on
settlement for liability for OU-1. In an April 18, 2008 letter, NYSDEC confirmed its acceptance of
the conceptual settlement. On August 13, 2008, the Company received for review and comment a
proposed Consent Decree to settle this matter.
The ROD for OU-2 has been deferred by NYSDEC until additional data is available to delineate
contamination and select an appropriate remedy. NYSDEC requested that the Company and Photocircuits
enter into a joint Order on Consent for the remedial investigation. Photocircuits was not willing
to enter into an Order and the Company was informed by NYSDEC that it would undertake the OU-2
investigation at the Photocircuits property. Photocircuits is now in Chapter 11 bankruptcy and, in
or about March 2006, the assets of Photocircuits Glen Cove facility were sold to American Pacific
Financial Corporation (AMPAC). AMPAC operated the facility under the Photocircuits name, but
closed it on or about April 15, 2007.
In July 2007, NYSDEC commenced the OU-2 investigation at both the Photocircuits and Pall
sites. The Company has retained an engineering consultant to oversee NYSDECs OU-2 work.
Hauppauge, New York:
On December 3, 2004, a third-party action was commenced against the Company in the United
States District Court for the Eastern District of New York in connection with groundwater
contamination. In the primary action, plaintiff Anwar Chitayat (Chitayat or the plaintiff)
seeks recovery against defendants Vanderbilt Associates and Walter Gross for environmental costs
allegedly incurred, and to be incurred, in connection with the disposal of hazardous substances
from property located in Hauppauge, New York (the Site). The Site is a property located in the
same industrial park as a Company facility. Vanderbilt Associates is the prior owner of the site
and Walter Gross was a partner in Vanderbilt Associates. Following Mr. Gross death in 2005,
Barbara Gross was substituted as a third-party plaintiff. Ms. Gross claims that the Company is
responsible for releasing hazardous substances into the soil and groundwater at its property, which
then migrated to the Site, and seeks indemnification and contribution under Section 113 of CERCLA
from third-party defendants, including the Company, in the event she is liable to Chitayat.
16
Chitayat alleges that prior to 1985, Vanderbilt Associates leased the Site to Sands Textiles
Finishers, Inc. for textile manufacturing and dry cleaning. Chitayat alleges that hazardous
substances were disposed at the Site during the time period that Mr. Gross and Vanderbilt
Associates owned and/or operated the Site, which migrated from the Site to surrounding areas.
Chitayat alleges that in August 1998, he entered into a Consent Order with the NYSDEC which
resulted in NYSDEC investigating the Site and developing a remediation plan, and required Chitayat
to reimburse the State via a periodic payment plan. Chitayat alleges that the total response costs
will exceed $3,000,000, and that he has incurred more than $500,000 in costs to date.
In 2005, the plaintiff moved to amend his complaint to add a claim for contribution under
Section 113 of CERCLA against the Company, and the Company opposed the proposed amendment. In March
2006, the Court terminated the plaintiffs motion to amend, and plaintiff has not renewed his
motion. As a result, the only claim asserted against the Company is by Barbara Gross.
The NYSDEC has designated two OUs associated with the Site. OU-1 relates to the on-site
contamination at 90, 100 and 110 Oser Avenue, and represents the geographic area which Chitayat
alleges will result in response costs in excess of $3,000,000. OU-2 relates to off-site groundwater
contamination migrating away from the Site. In January 2006, the NYSDEC issued a ROD selecting a
remedial program for OU-2 which is projected to cost approximately $4,500,000 to implement.
Fact discovery in the case was completed in January 2006. Experts for plaintiff, Barbara
Gross, Vanderbilt Associates and the Company served expert reports in March and April 2006, and
expert discovery was concluded in May 2006. There is a dispute among the experts as to whether
contaminants from the Companys facility have contributed to cleanup costs at the Site and, if so,
to what extent. In September 2006, the Court established a briefing schedule for all parties to
submit summary judgment motions, and for Barbara Gross and the Company to make motions to strike
certain expert testimony. Third-party defendants, including the Company, filed motions for summary
judgment on October 6, 2006. The Company also filed motions to strike certain expert testimony.
Plaintiff filed opposition papers with the Court on November 6, 2006, and the moving third-party
defendants, including the Company, filed reply papers on November 20, 2006.
While the motions were pending, the parties enlisted the aid of a mediator to negotiate a
settlement of the case. The parties met with the mediator on July 30 through August 1, 2007, which
resulted in a tentative settlement agreement, subject to drafting of definitive settlement
documents. During the process of negotiating the settlement documents, a disagreement developed
between the plaintiff and the primary defendants as to the terms of establishment of the settlement
fund that had been agreed upon at the mediation. Although the plaintiff and the primary defendants
continued in discussions for several months, this dispute has not been resolved. The discussions
appear to have ceased and the proposed settlement has not yet been achieved.
The summary judgment motions remains pending without a decision. On September 27, 2007, the
Court issued a decision on the Companys motions in limine to preclude testimony by the experts for
plaintiff and third-party plaintiff Barbara Gross, granting the motions in part and denying them in
part.
If the settlement were completed as contemplated, the Companys responsibility would be fixed
and it would be released from further liability to the plaintiff or third-party plaintiffs. Because
it is not completed, if the Companys motion for summary judgment is denied, the case will
continue. If that happens, the Company will remain subject to potential liability and an allocation
of some portion of the response costs paid by plaintiff to the State of New York.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
(a) |
|
The Annual Meeting of Shareholders of the Company was held on May 28, 2008. |
|
|
(b) |
|
Proposal I Election of Directors |
|
|
|
|
Holders of 101,843,890 shares of common stock voted either in person or by proxy for the
election of five directors. The number of votes cast for each nominee were as indicated
below: |
|
|
|
|
|
|
|
|
|
Total vote |
|
|
Total vote for |
|
withheld for |
Director |
|
each director |
|
each director |
Cheryl W. Grisé
|
|
100,219,528
|
|
1,624,362 |
John H. F. Haskell, Jr.
|
|
95,908,692
|
|
5,935,198 |
Katharine L. Plourde
|
|
94,196,422
|
|
7,647,468 |
Heywood Shelley
|
|
94,387,021
|
|
7,456,869 |
Edward Travaglianti
|
|
95,881,386
|
|
5,962,504 |
|
|
|
Directors whose term of office continues past the Annual Meeting of Shareholders are Ulric
S. Haynes, Jr.; Edwin W. Martin, Jr.; Daniel J. Carroll, Jr.; Eric Krasnoff; Dennis N.
Longstreet; and Edward L. Snyder. |
|
|
(c) |
|
Proposal II Ratify the Appointment of KPMG LLP as Independent Registered Public
Accounting Firm for Fiscal Year 2008. |
|
|
|
|
The proposal was approved as follows: |
|
|
|
|
|
Shares For |
|
Shares Against |
|
Abstain |
98,169,846
|
|
2,708,966
|
|
965,078 |
|
|
|
Proposal III Amendment of Pall Corporation Employee Stock Purchase Plan |
|
|
|
|
The proposal was approved as follows: |
|
|
|
|
|
|
|
Shares For |
|
Shares Against |
|
Abstain |
|
Nonvotes |
82,226,641
|
|
908,780
|
|
1,061,838
|
|
17,646,631 |
EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Appointed an |
Name |
|
Age(1) |
|
Current Positions Held |
|
Executive Officer |
Eric Krasnoff(2)
|
|
|
56 |
|
|
Chairman and Chief Executive Officer
|
|
1986 |
|
|
Lisa McDermott
|
|
|
43 |
|
|
Chief Financial Officer and Treasurer
|
|
2006 |
|
|
Donald B. Stevens
|
|
|
63 |
|
|
President and President, Industrial
|
|
1994 |
|
|
Roberto Perez
|
|
|
59 |
|
|
Group Vice President and President, Life Sciences
|
|
2003 |
|
|
Sandra Marino
|
|
|
38 |
|
|
Senior Vice President and General Counsel
|
|
2008 |
|
|
(1) Age as of September 22, 2008.
(2) Mr. Krasnoff is a director of the Company and member of the boards executive
committee.
None of the persons listed above is related.
For more than the past five years, the principal occupation of persons listed above has been
their employ by the registrant, except for Ms. Marino. Ms. Marino has been employed by the
registrant since January 2005, as Corporate Counsel and Assistant Corporate Secretary. She was
promoted to Corporate Secretary in March 2008 and Senior Vice President and General Counsel as of
September 1, 2008. Prior to January 2005, she was employed as a corporate attorney at Carter
Ledyard & Milburn LLP.
None of the above persons has been involved in those legal proceedings required to be
disclosed by Item 401(f) of Regulation S-K during the past five years.
18
PART II
ITEM
5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Companys common stock is listed on the New York Stock Exchange (NYSE) under the symbol
PLL. The table below sets forth quarterly data relating to the Companys common stock prices and
cash dividends declared per share for the past two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends |
|
|
|
2008 |
|
|
2007 |
|
|
Declared Per Share |
|
Price per share |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
2008 |
|
|
2007 |
|
Quarter: First |
|
$ |
44.55 |
|
|
$ |
33.46 |
|
|
$ |
32.20 |
|
|
$ |
25.26 |
|
|
$ |
0.24 |
|
|
$ |
0.11 |
|
Second |
|
|
42.26 |
|
|
|
33.37 |
|
|
|
35.57 |
|
|
|
30.58 |
|
|
|
0.12 |
|
|
|
0.12 |
|
Third |
|
|
41.48 |
|
|
|
34.01 |
|
|
|
42.15 |
|
|
|
33.70 |
|
|
|
0.13 |
|
|
|
0.12 |
|
Fourth |
|
|
43.19 |
|
|
|
34.33 |
|
|
|
49.00 |
|
|
|
38.43 |
|
|
|
0.13 |
|
|
|
|
|
As of September 22, 2008 there were approximately 3,527 holders of record of the Companys
common stock. Dividends are paid when, as and if declared by the board of directors of the Company.
PERFORMANCE GRAPH
The following graph compares the annual change in the cumulative total return on the Companys
common stock during the Companys last five fiscal years with the annual change in the cumulative
total return of the Standard & Poors Composite-500 Index and the Standard & Poors Industrial
Machinery Index (which includes the Company). The graph assumes an investment of $100 on August 1,
2003 (the last trading day of the Companys fiscal year 2003) and the reinvestment of all dividends
paid during the last five fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Aug-03 |
|
|
30-Jul-04 |
|
|
29-Jul-05 |
|
|
31-Jul-06 |
|
|
31-Jul-07 |
|
|
31-Jul-08 |
|
|
Pall Corp.
|
|
|
$ |
100 |
|
|
|
$ |
103 |
|
|
|
$ |
140 |
|
|
|
$ |
120 |
|
|
|
$ |
193 |
|
|
|
$ |
191 |
|
|
|
S&P 500
|
|
|
$ |
100 |
|
|
|
$ |
114 |
|
|
|
$ |
130 |
|
|
|
$ |
137 |
|
|
|
$ |
160 |
|
|
|
$ |
142 |
|
|
|
S&P Industrial Machinery
|
|
|
$ |
100 |
|
|
|
$ |
130 |
|
|
|
$ |
141 |
|
|
|
$ |
147 |
|
|
|
$ |
190 |
|
|
|
$ |
174 |
|
|
|
Copyright © 2008, Standard & Poors, a division of The McGraw-Hill Companies, Inc. All right reserved.
19
The following table provides information with respect to purchases made by or on behalf of the
Company or any affiliated purchaser of the Companys common stock during the quarter ended July
31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Dollar Value of Shares |
|
|
|
Total Number |
|
|
|
|
|
|
Part of Publicly |
|
|
that May Yet Be |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Period |
|
Purchased |
|
|
Paid Per Share |
|
|
Programs (1) |
|
|
Plans or Programs (1) |
|
May 1, 2008 to
May 31, 2008 |
|
|
1,136 |
|
|
$ |
35.23 |
|
|
|
1,136 |
|
|
$ |
230,021 |
|
June 1, 2008 to
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2008 to
July 31, 2008 |
|
|
782 |
|
|
|
39.16 |
|
|
|
782 |
|
|
$ |
199,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,918 |
|
|
$ |
36.83 |
|
|
|
1,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On October 14, 2004, the Companys board of directors authorized the expenditure of up
to $200,000 for the repurchase of shares of the Companys common stock. On November 15,
2006, the board authorized an additional expenditure of $250,000 to repurchase shares. The
Companys shares may be purchased over time, as market and business conditions warrant.
There is no time restriction on this authorization. During the fourth quarter of fiscal
year 2008, the Company purchased 1,918 shares in open-market transactions at an aggregate
cost of $70,639, with an average price per share of $36.83. Total repurchases in fiscal
year 2008 were 4,056 shares at an aggregate cost of $148,850, with an average price per
share of $36.70. The aggregate cost of repurchases in fiscal years 2007 and 2006 was
$61,795 (1,586 shares at an average price per share of $38.98) and $100,727 (3,556 shares
at an average price per share of $28.33), respectively. As of July 31, 2008, $199,382
remains to be expended under the current board repurchase authorizations. Repurchased
shares are held in treasury for use in connection with the Companys stock plans and for
general corporate purposes. |
|
|
|
During the fourth quarter and full year of fiscal year 2008, 7 shares were traded in by employees
in payment of stock option exercises at an average price of $41.84 per share and an aggregate cost
of $293. |
20
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the last five fiscal years. This
selected financial data is not necessarily indicative of results of future operations and should be
read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and the accompanying consolidated financial statements and related notes
included elsewhere in this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
RESULTS FOR THE YEAR: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,571.6 |
|
|
$ |
2,249.9 |
|
|
$ |
2,016.8 |
|
|
$ |
1,902.3 |
|
|
$ |
1,770.7 |
|
Cost of sales |
|
|
1,360.8 |
|
|
|
1,190.5 |
(a) |
|
|
1,072.8 |
(a) |
|
|
978.9 |
(a) |
|
|
899.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,210.8 |
|
|
|
1,059.4 |
|
|
|
944.0 |
|
|
|
923.4 |
|
|
|
871.6 |
|
Selling, general and administrative expenses |
|
|
749.5 |
|
|
|
675.0 |
|
|
|
641.0 |
|
|
|
621.4 |
|
|
|
583.5 |
|
Research and development |
|
|
71.6 |
|
|
|
62.4 |
|
|
|
57.3 |
|
|
|
56.2 |
|
|
|
57.3 |
|
Restructuring and other charges, net |
|
|
31.5 |
|
|
|
22.4 |
|
|
|
12.3 |
|
|
|
38.8 |
|
|
|
12.5 |
|
Interest expense, net |
|
|
32.6 |
|
|
|
39.1 |
|
|
|
30.2 |
|
|
|
30.0 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
325.6 |
|
|
|
260.5 |
|
|
|
203.2 |
|
|
|
177.0 |
|
|
|
194.7 |
|
Provision for income taxes |
|
|
108.3 |
|
|
|
133.0 |
|
|
|
151.1 |
|
|
|
63.3 |
|
|
|
71.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
217.3 |
(b) |
|
$ |
127.5 |
(b) |
|
$ |
52.1 |
(b) |
|
$ |
113.7 |
|
|
$ |
123.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.77 |
|
|
$ |
1.04 |
|
|
$ |
0.42 |
|
|
$ |
0.91 |
|
|
$ |
0.98 |
|
Diluted |
|
|
1.76 |
|
|
|
1.02 |
|
|
|
0.41 |
|
|
|
0.91 |
|
|
|
0.98 |
|
Dividends declared per share |
|
|
0.62 |
|
|
|
0.35 |
|
|
|
0.43 |
|
|
|
0.39 |
|
|
|
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
123.9 |
|
|
$ |
97.8 |
|
|
$ |
96.0 |
|
|
$ |
86.2 |
|
|
$ |
61.3 |
|
Depreciation and amortization of long-lived
assets |
|
$ |
93.2 |
|
|
$ |
94.0 |
|
|
$ |
95.7 |
|
|
$ |
90.9 |
|
|
$ |
88.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR-END POSITION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
1,085.7 |
(c) |
|
$ |
774.2 |
|
|
$ |
653.3 |
|
|
$ |
598.1 |
|
|
$ |
542.7 |
|
Property, plant and equipment, net |
|
|
663.0 |
|
|
|
607.9 |
|
|
|
621.0 |
|
|
|
608.8 |
|
|
|
600.4 |
|
Total assets |
|
|
2,956.7 |
|
|
|
2,708.8 |
|
|
|
2,461.3 |
|
|
|
2,185.3 |
|
|
|
2,112.7 |
|
Long-term debt, net of current portion |
|
|
747.1 |
|
|
|
591.6 |
|
|
|
640.0 |
|
|
|
510.2 |
|
|
|
488.7 |
|
Total liabilities |
|
|
1,817.5 |
|
|
|
1,648.2 |
|
|
|
1,524.2 |
|
|
|
1,193.2 |
|
|
|
1,179.2 |
|
Stockholders equity |
|
|
1,139.2 |
|
|
|
1,060.6 |
|
|
|
937.1 |
|
|
|
992.1 |
|
|
|
933.5 |
|
|
|
|
a) |
|
Includes $2.8, $1.7 and $0.8 of adjustments recorded in cost of sales in fiscal years
2007, 2006 and 2005, respectively. The adjustments include a one-time purchase accounting
adjustment to record, at market value, inventory acquired from the BioSepra® Process
Division (BioSepra) of Ciphergen Biosystems, Inc. This resulted in a $2.4 increase in
acquired inventories in fiscal year 2005, in accordance with SFAS No. 141, Business
Combinations (SFAS No. 141), in the opening balance sheet and an increase in cost of
sales of $0.6, $0.9 and $0.8 in fiscal years 2007, 2006 and 2005, respectively, concurrent
with the sale of a portion of the underlying inventory. The adjustment is considered
non-recurring in nature because, although the Company acquired the manufacturing operations
of BioSepra, this adjustment was required by SFAS No. 141 as an elimination of the
manufacturing profit in inventory acquired from BioSepra and subsequently sold in the
period. The adjustments recorded in cost of sales also reflect $2.2 and $0.8 in fiscal
years 2007 and 2006, respectively, primarily comprised of incremental depreciation from the
planned early retirement of certain fixed assets recorded in conjunction with the Companys
facilities rationalization initiatives in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). |
|
b) |
|
Effective August 1, 2005, the Company adopted SFAS 123(R), Share Based Payment (SFAS
No. 123(R)). The years ended July 31, 2008, July 31, 2007 and July 31, 2006 include
stock-based compensation expense related to stock options and the employee stock purchase
plan of $5.2, $4.7 and $7.2, respectively, after pro forma tax effect (4, 4 and 6 cents per
share, respectively). |
|
c) |
|
Non-cash working capital at July 31, 2008 has been impacted by the adoption of a new
accounting standard, FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48).
Consistent with the provisions of FIN No. 48, the Company has reclassified certain tax
related assets and liabilities from current to non-current. Such reclassifications had the
effect of increasing non-cash working capital at July 31, 2008 by approximately $137.0. |
21
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking Statements and Risk Factors
You should read the following discussion together with the accompanying consolidated financial
statements and notes thereto and other financial information in this Form 10-K. The discussions
under the subheadings Review of Operating Segments below are in local currency unless indicated
otherwise. Company management considers local currency growth an important measure because by
excluding the volatility of exchange rates, underlying volume change is clearer. Dollar amounts
discussed below are in thousands, unless otherwise indicated, except per share dollar amounts. In
addition, per share dollar amounts are discussed on a diluted basis.
The matters discussed in this Annual Report on Form 10-K contain forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements
contained in this and other written and oral reports are based on current Company expectations and
are subject to risks and uncertainties, which could cause actual results to differ materially. All
statements regarding future performance, earnings projections, earnings guidance, managements
expectations about its future cash needs and effective tax rate, and other future events or
developments are forward-looking statements. Such risks and uncertainties included, but are not
limited to, those discussed in Part I, Item 1A, Risk Factors in this Form 10-K. The Company makes
these statements as of the date of this disclosure and undertakes no obligation to update them.
Critical Accounting Policies and Estimates
The Companys accompanying consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles. These accounting principles require the Company to
make certain estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the accompanying consolidated financial statements, as well as the reported amounts
of revenues and expenses during the periods presented. Although these estimates are based on
Company managements knowledge of current events and actions it may undertake in the future, actual
results may differ from estimates. The following discussion addresses the Companys most critical
accounting policies, which are those that are most important to the portrayal of the Companys
financial condition and results, and that require judgment. See also the notes to the accompanying
consolidated financial statements, which contain additional information regarding the Companys
accounting policies.
Income Taxes
Significant judgment is required in determining the worldwide provision for income taxes. In
the ordinary course of a global business, there are many transactions and calculations where the
ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue
sharing and cost reimbursement arrangements among related entities, the process of identifying
items of revenue and expense that qualify for preferential tax treatment and appropriate
segregation of foreign and domestic income and expense to avoid double taxation. No assurance can
be given that the final tax outcome of these matters will not be different than that which is
reflected in the Companys historical income tax provisions and accruals. Such differences could
have a material effect on the Companys income tax provision and net earnings in the period in
which a final determination is made.
The Company records a valuation allowance to reduce deferred tax assets to the amount of the
future tax benefit that is more likely than not to be realized. While Company management has
considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, there is no assurance that the valuation allowance
would not need to be increased to cover additional deferred tax assets that may not be realizable.
Any increase in the valuation allowance could have a material adverse impact on the Companys
income tax provision and net earnings in the period in which such determination is made.
Purchase Accounting and Goodwill
Determining the fair value of certain assets and liabilities acquired in a business
combination in accordance with SFAS No. 141 is judgmental in nature and often involves the use of
significant estimates and assumptions. There are various methods used to estimate the value of
tangible and intangible assets acquired, such as discounted cash flow and market multiple
approaches. Some of the more significant estimates and assumptions inherent in the two approaches
include: projected future cash flows (including timing); discount rates reflecting the risk
inherent in the future cash flows; perpetual growth rate; determination of appropriate market
comparables; and the determination of whether a premium or a discount should be applied to
comparables. There are also judgments made to determine the expected useful lives assigned to each
class of assets and liabilities acquired.
22
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts
assigned to identifiable assets acquired less liabilities assumed. The Company performs goodwill
impairment tests at least annually, including whenever events or circumstances indicate impairment
might have occurred. In response to changes in industry and market conditions, the Company may
strategically realign its resources and consider restructuring, disposing of, or otherwise exiting
businesses, which could result in an impairment of goodwill. Based on impairment tests performed,
there was no impairment of goodwill in fiscal years 2008, 2007 and 2006.
Revenue Recognition
Revenue is recognized when title and risk of loss have transferred to the customer and when
contractual terms have been fulfilled. Transfer of title and risk of loss occurs when the product
is delivered in accordance with the contractual shipping terms. In instances where contractual
terms include a provision for customer acceptance, revenue is recognized when either (i) the
Company has previously demonstrated that the product meets the specified criteria for contracts
with acceptance provisions based on either seller or customer-specified objective criteria or (ii)
upon formal acceptance received from the customer for contracts with acceptance provisions where
the product has not been previously demonstrated to meet customer-specified objective criteria.
Revenue for contracts which are accounted for under the percentage of completion method is based
upon the ratio of costs incurred to date compared with estimated total costs to complete. The
cumulative impact of revisions to total estimated costs is reflected in the period of the change,
including anticipated losses.
Allowance for Doubtful Accounts
Company management evaluates its ability to collect outstanding receivables and provide
allowances when collection becomes doubtful. In performing this evaluation, significant estimates
are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon
this information, Company management records in earnings an amount believed to be uncollectible. If
the historical data used to calculate the allowance provided for doubtful accounts does not reflect
the future ability to collect outstanding receivables, additional provisions for doubtful accounts
may be needed and the future results of operations could be materially affected.
Inventories
Inventories are valued at the lower of cost (principally on the first-in, first-out method) or
market. The Company records adjustments to the carrying value of inventory based upon assumptions
about historic usage, future demand and market conditions. These adjustments are estimates which
could vary significantly, either favorably or unfavorably, from actual requirements if future
conditions, customer inventory levels or competitive conditions differ from the Companys
expectations.
Recoverability of Available-for-Sale Investments
Other than temporary losses relating to available-for-sale investments are recognized in
earnings when Company management determines that the recoverability of the cost of the investment
is unlikely. Such losses could result in a material adjustment in the period of the change. Company
management considers numerous factors, on a case-by-case basis, in evaluating whether the decline
in market value of an available-for-sale security below cost is other than temporary. Such factors
include, but are not limited to, (i) the length of time and the extent to which the market value
has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of
the investment; and (iii) whether Company management intends to retain the investment for a period
of time that is sufficient to allow for any anticipated recovery in market value.
Defined Benefit Retirement Plans
The Company sponsors defined benefit retirement plans in various forms covering substantially
all employees who meet eligibility requirements. Several statistical and other factors that attempt
to anticipate future events are used in calculating the expense and liabilities related to those
plans for which the benefit is actuarially determined (i.e., defined benefit plans). These factors
include assumptions about the discount rate, expected return on plan assets and rate of future
compensation increases as determined by the Company, within certain guidelines. In addition, the
Companys actuarial consultants also use subjective factors, such as withdrawal and mortality
rates, to calculate the liabilities and expense. The actuarial assumptions used by the Company are
long-term assumptions and may differ materially from actual experience in the short-term due to
changing market and economic conditions and changing participant demographics. These differences
may have a significant effect on the amount of pension expense recorded by the Company.
23
Pension expense associated with the Companys defined benefit plans was $25,363 in fiscal year
2008, which was based on a weighted average discount rate of 5.70% (calculated using the projected
benefit obligation) and a weighted average expected long-term rate of return on plan assets of
6.63% (calculated using the fair value of plan assets).
The expected rates of return on the various defined benefit pension plans assets are based on
the asset allocation of each plan and the long-term projected return of those assets. If the
expected long-term rate of return on plan assets was reduced by 50 basis points, projected pension
expense in fiscal year 2008 would have increased approximately $1,300.
The objective of the discount rate assumption is to reflect the rate at which the pension
benefits could be effectively settled. The Companys methodology for selecting the discount rate
for the U.S. plans as of July 31, 2008 was to match the plans cash flows to that of a yield curve
that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash
flows due in a particular year can be settled theoretically by investing them in the
zero-coupon bond that matures in the same year. The discount rate is the single rate that produces
the same present value of cash flows. The discount rate assumption for non-U.S. plans reflects the
market rate for high-quality, fixed-income debt instruments. Both discount rate assumptions are
based on the expected duration of benefit payments for each of the Companys pension plans as of
the annual measurement date and is subject to change each year. If the weighted average discount
rate was reduced by 50 basis points, pension expense in fiscal year 2008 would have increased by
approximately $2,500.
Accrued Expenses and Contingencies
Company management estimates certain material expenses in an effort to record those expenses
in the period incurred. When no estimate in a given range is deemed to be better than any other,
the low end of the range is accrued. Differences between estimates and assumptions and actual
results could result in an accrual requirement materially different from the calculated accrual.
Environmental accruals are recorded based upon historical costs incurred and estimates for
future costs of remediation and on-going legal expenses which have a high degree of uncertainty.
Self-insured workers compensation insurance accruals are recorded based on insurance claims
processed, including applied loss development factors as well as historical claims experience for
claims incurred but not yet reported. Self-insured employee medical insurance accruals are recorded
based on medical claims processed as well as historical medical claims experience for claims
incurred but not yet reported.
Results of Operations 2008 Compared with 2007
Review of Consolidated Results
Sales for the fiscal year 2008 increased 14.3% to $2.6 billion from $2.2 billion in fiscal
year 2007. Exchange rates increased reported sales by $159,134, primarily due to the weakening of
the U.S. dollar against the Euro, the British Pound, the Yen and various other Asian currencies. In
local currency (i.e., had exchange rates not changed year over year), sales increased 7.2%.
Increased pricing achieved in both the Life Sciences and Industrial segments contributed 1% to
overall sales growth in the year and, as such, the overall volume increase was 6.2%.
Life Sciences segment sales increased 4.5% (in local currency), attributable to growth in the
BioPharmaceuticals market, partly offset by a slight decrease in the Medical market. Industrial
segment sales increased 9% (in local currency) driven by growth in the Energy, Water & Process
Technologies market (formerly General Industrial) and Aerospace & Transportation markets, partially
offset by decreased sales in the Microelectronics market. Overall systems sales increased 26.4%,
representing 12.4% of total sales in fiscal year 2008 compared to 10.4% in fiscal year 2007,
primarily attributable to strong sales in the BioPharmaceuticals, Energy, Water & Process
Technologies and Aerospace & Transportation markets. Company management expects overall sales in
local currency to increase in the range of 5% 6.5% in fiscal year 2009 compared to fiscal year
2008, with growth rates in both Life Sciences and Industrial falling within that range. For a
detailed discussion of sales, refer to the section Review of Operating Segments below.
24
Gross margin, as a percentage of sales, was 47.1% in fiscal year 2008 on par with fiscal year
2007. Improved pricing in both segments contributed approximately 50 basis points in margin. Gross
margin has been favorably impacted by a change in market mix within consumables in the Life
Sciences segment, improved profitability on certain systems sales in the Industrial segment and
savings generated from the Companys facilities rationalization initiative and other manufacturing
cost reduction and efficiency programs, including lean initiatives to improve labor productivity,
that dampened estimated inflationary pressures on manufacturing costs. These factors were offset by
the impact of a shift in product mix, to a higher percentage of systems sales (about 12.4% compared
to 10.4% in fiscal year 2007), which are typically at lower margins than consumables, mix change
within consumables to lower margin products in Industrial, and incremental costs related to the
facilities rationalization initiative. The Company continued to make progress on its facilities
rationalization initiative and in fiscal year 2008 completed the closure of a plant in Waldstetten,
Germany. For a detailed discussion of gross margin by segment, refer to the section Review of
Operating Segments below. Company management is targeting gross margin to be about 48.5% in fiscal
year 2009, as expected pricing increases and surcharges as well as continued efficiencies from the
Companys cost reduction initiatives are expected to more than offset inflationary pressures on
operating costs.
Selling, general and administrative (SG&A) expenses in fiscal year 2008 increased by
$74,514, or about 11% (approximately 5% in local currency). As a percentage of sales, SG&A expenses
decreased to 29.1% from 30% in fiscal year 2007. The decrease in SG&A as a percentage of sales
reflects the leveraging of growth in sales, and the impact of cost reduction initiatives, including
the initiative to optimize the Companys European operations (EuroPall) partly offset by the
impact of increased selling related expenses in the Industrial segment and an increase in Corporate
expenses primarily attributable to increased professional fees related to tax and audit services as well as the addition of tax and treasury function personnel.
In fiscal year 2007, the Company
launched the equivalent of the EuroPall program in the Western Hemisphere (AmeriPall). This
program is in the early implementation phase with the majority of the impact expected in fiscal
year 2009 and beyond. In fiscal year 2009, Company management is expecting SG&A expenses, as a
percentage of sales to be about 29%.
Research and development (R&D) expenses were $71,647 in fiscal year 2008 compared to $62,414
in fiscal year 2007, up about 15% year over year (approximately 13% in local currency). As a
percentage of sales, R&D expenses were 2.8% on par with fiscal year 2007. In fiscal year 2009,
Company management expects R&D expenses to increase approximately 15-20%.
In fiscal year 2008, the Company recorded restructuring and other charges (ROTC) of $31,538.
ROTC in the year was primarily comprised of legal and other professional fees related to matters
that were under inquiry by the audit committee (see Note 2, Audit Committee Inquiry and
Restatement, to the consolidated financial statements included in the 2007 Form 10-K).
Additionally, ROTC includes severance and other exit costs related to the Companys on-going cost
reduction initiatives (including its facilities rationalization, EuroPall and AmeriPall
initiatives), as well as an increase to previously established environmental reserves. Such charges
were partly offset by the reversal of excess restructuring reserves recorded in the Companys
consolidated statements of earnings in fiscal years 2007, 2006 and 2005.
25
In fiscal year 2007, the Company recorded ROTC of $22,352, primarily related to the Companys
on-going cost reduction initiatives (including its facilities rationalization, EuroPall and
AmeriPall initiatives). The ROTC recorded in fiscal year 2007 was primarily comprised of severance,
impairment charges related to the planned disposal of buildings and early retirement of certain
long-lived assets, and other costs in connection with such initiatives. Additionally, the charges
in fiscal year 2007 include an increase to previously established environmental reserves. Such
charges were partly offset by the gain on the sale of the Companys corporate headquarters, an
insurance settlement related to an environmental matter, and the reversal of excess restructuring
reserves recorded in the Companys consolidated statements of earnings in fiscal years 2006 and
2005.
The details of ROTC for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 can be
found in Note 2, Restructuring and Other Charges, Net, to the accompanying consolidated financial
statements.
The following table summarizes the activity related to restructuring liabilities that were
recorded in fiscal years 2008, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
8,814 |
|
|
$ |
3,110 |
|
|
$ |
11,924 |
|
Utilized |
|
|
(8,059 |
) |
|
|
(2,849 |
) |
|
|
(10,908 |
) |
Other changes (a) |
|
|
220 |
|
|
|
6 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
975 |
|
|
$ |
267 |
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge (b) |
|
$ |
22,083 |
|
|
$ |
4,321 |
|
|
$ |
26,404 |
|
Utilized |
|
|
(6,146 |
) |
|
|
(3,573 |
) |
|
|
(9,719 |
) |
Other changes (a) |
|
|
611 |
|
|
|
9 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007 |
|
|
16,548 |
|
|
|
757 |
|
|
|
17,305 |
|
Utilized |
|
|
(13,994 |
) |
|
|
(727 |
) |
|
|
(14,721 |
) |
Reversal of excess reserves
(c) |
|
|
(297 |
) |
|
|
(65 |
) |
|
|
(362 |
) |
Other changes (a) |
|
|
1,281 |
|
|
|
57 |
|
|
|
1,338 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
3,538 |
|
|
$ |
22 |
|
|
$ |
3,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
13,335 |
|
|
$ |
3,043 |
|
|
$ |
16,378 |
|
Utilized |
|
|
(7,221 |
) |
|
|
(2,900 |
) |
|
|
(10,121 |
) |
Other changes (a) |
|
|
182 |
|
|
|
9 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
6,296 |
|
|
|
152 |
|
|
|
6,448 |
|
Utilized |
|
|
(2,712 |
) |
|
|
(108 |
) |
|
|
(2,820 |
) |
Reversal of excess reserves (c) |
|
|
(1,385 |
) |
|
|
(40 |
) |
|
|
(1,425 |
) |
Other changes (a) |
|
|
126 |
|
|
|
2 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007 |
|
|
2,325 |
|
|
|
6 |
|
|
|
2,331 |
|
Utilized |
|
|
(1,414 |
) |
|
|
(6 |
) |
|
|
(1,420 |
) |
Reversal of excess reserves (c) |
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
Other changes (a) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
851 |
|
|
$ |
|
|
|
$ |
851 |
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
17,496 |
|
|
$ |
2,928 |
|
|
$ |
20,424 |
|
Utilized |
|
|
(8,404 |
) |
|
|
(2,739 |
) |
|
|
(11,143 |
) |
Other changes (a) |
|
|
(86 |
) |
|
|
4 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005 |
|
|
9,006 |
|
|
|
193 |
|
|
|
9,199 |
|
Utilized |
|
|
(3,243 |
) |
|
|
(87 |
) |
|
|
(3,330 |
) |
Reversal of excess reserves (c) |
|
|
(1,905 |
) |
|
|
(96 |
) |
|
|
(2,001 |
) |
Other changes (a) |
|
|
57 |
|
|
|
3 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
3,915 |
|
|
|
13 |
|
|
|
3,928 |
|
Utilized |
|
|
(2,531 |
) |
|
|
|
|
|
|
(2,531 |
) |
Reversal of excess reserves (c) |
|
|
(811 |
) |
|
|
(15 |
) |
|
|
(826 |
) |
Other changes (a) |
|
|
31 |
|
|
|
2 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
Utilized |
|
|
(442 |
) |
|
|
|
|
|
|
(442 |
) |
Reversal of excess reserves
(c) |
|
|
(164 |
) |
|
|
|
|
|
|
(164 |
) |
Other changes (a) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other changes primarily reflect translation impact. |
|
(b) |
|
Excludes $757 related to pension liabilities. |
|
(c) |
|
Reflects the reversal of excess restructuring reserves originally recorded in fiscal
years 2007, 2006 and 2005. |
Earnings before interest and income taxes (EBIT) were $358,131 in fiscal year 2008 compared
to $299,585 in fiscal year 2007 reflecting the factors discussed above. As a percentage of sales,
EBIT was 13.9% compared to 13.3% in fiscal year 2007.
Net interest expense in fiscal year 2008 decreased to $32,576 from $39,056 in fiscal year
2007. The decline in net interest expense was principally attributable to a decrease in the amount
of interest expense recorded due to a payment of $135,000 to the IRS related to the tax matter (for
discussion of tax matter see Note 2, Audit Committee Inquiry and Restatement, to the consolidated
financial statements included in the 2007 Form 10-K) partly offset by increased interest expense
primarily related to higher debt levels in the U.S. compared to the same period last year.
In fiscal year 2008, the Companys effective tax rate was 33.2% as compared to 51.1% in fiscal
year 2007. The decrease in the effective tax rate was primarily due to charges taken in fiscal year
2007 for the net tax cost of the anticipated repatriation of approximately $160,000 of foreign
earnings and additional taxes provided on intercompany transactions net of an increase related to
the mix of foreign earnings. The effective tax rate in fiscal year 2008 includes charges resulting
from new tax legislation in certain foreign jurisdictions and an incremental tax expense of $2,436
related to cash repatriated in fiscal year 2008 under the plan discussed above. In fiscal year
2009, Company management expects its effective tax rate to start to improve compared to fiscal year
2008. See Note 10, Income Taxes, to the accompanying consolidated financial statements for further
details on the components of the Companys effective tax rate.
Net earnings in fiscal year 2008 were $217,279, or $1.76 per share, compared with net earnings
of $127,497, or $1.02 per share in fiscal year 2007. In summary, net earnings reflect the growth in
EBIT, a decrease in net interest expense and a decrease in the effective tax rate. Company
management estimates that foreign currency translation increased net earnings by approximately 14
cents per share in the year. In fiscal year 2009, Company management expects earnings per share to
be in the range of $2.15 $2.30. This range contemplates an expectation that the acquisition of
GeneSystems will be dilutive to earnings by 3 5 cents but does not include items that would be
classified as restructuring and other charges, including any In Process Research and Development
charge that the Company may record related to the GeneSystems acquisition.
27
Review of Operating Segments
The following table presents sales and operating profit by segment for the fiscal years ended
July 31, 2008 and July 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
% |
|
|
|
2008 |
|
|
Margin |
|
|
2007 |
|
|
Margin |
|
|
Change |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
975,231 |
|
|
|
|
|
|
$ |
880,187 |
|
|
|
|
|
|
|
10.8 |
|
Industrial |
|
|
1,596,414 |
|
|
|
|
|
|
|
1,369,718 |
|
|
|
|
|
|
|
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,571,645 |
|
|
|
|
|
|
$ |
2,249,905 |
|
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
197,774 |
|
|
|
20.3 |
|
|
$ |
165,286 |
|
|
|
18.8 |
|
|
|
19.7 |
|
Industrial |
|
|
245,855 |
|
|
|
15.4 |
|
|
|
204,114 |
|
|
|
14.9 |
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
443,629 |
|
|
|
17.3 |
|
|
|
369,400 |
|
|
|
16.4 |
|
|
|
20.1 |
|
General corporate expenses |
|
|
53,960 |
|
|
|
|
|
|
|
44,718 |
|
|
|
|
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before ROTC,
interest expense, net and
income taxes |
|
|
389,669 |
|
|
|
15.2 |
|
|
|
324,682 |
(a) |
|
|
14.4 |
|
|
|
20.0 |
|
ROTC |
|
|
31,538 |
|
|
|
|
|
|
|
25,097 |
(a) |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
32,576 |
|
|
|
|
|
|
|
39,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
325,555 |
|
|
|
|
|
|
$ |
260,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in ROTC, for the purposes of evaluation of segment profitability, are other
adjustments recorded in cost of sales of $2,745 for the year ended July 31, 2007. Such
adjustments include incremental depreciation and other adjustments recorded primarily in
conjunction with the Companys facilities rationalization initiative. |
Life Sciences:
Presented below are Summary Statements of Operating Profit for the Life Sciences segment for
the fiscal years ended July 31, 2008 and July 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
Sales |
|
$ |
975,231 |
|
|
|
|
|
|
$ |
880,187 |
|
|
|
|
|
Cost of sales |
|
|
473,298 |
|
|
|
48.5 |
|
|
|
432,190 |
|
|
|
49.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
501,933 |
|
|
|
51.5 |
|
|
|
447,997 |
|
|
|
50.9 |
|
SG&A |
|
|
263,233 |
|
|
|
27.0 |
|
|
|
248,851 |
|
|
|
28.3 |
|
R&D |
|
|
40,926 |
|
|
|
4.2 |
|
|
|
33,860 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
197,774 |
|
|
|
20.3 |
|
|
$ |
165,286 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and geography within the Life Sciences segment for
the fiscal years ended July 31, 2008 and July 31, 2007, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
491,798 |
|
|
$ |
475,369 |
|
|
|
3.5 |
|
|
$ |
20,483 |
|
|
|
(0.9 |
) |
BioPharmaceuticals |
|
|
483,433 |
|
|
|
404,818 |
|
|
|
19.4 |
|
|
|
35,071 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
975,231 |
|
|
$ |
880,187 |
|
|
|
10.8 |
|
|
$ |
55,554 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
379,591 |
|
|
$ |
377,301 |
|
|
|
0.6 |
|
|
$ |
1,432 |
|
|
|
0.2 |
|
Europe |
|
|
469,450 |
|
|
|
391,500 |
|
|
|
19.9 |
|
|
|
44,905 |
|
|
|
8.4 |
|
Asia |
|
|
126,190 |
|
|
|
111,386 |
|
|
|
13.3 |
|
|
|
9,217 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
975,231 |
|
|
$ |
880,187 |
|
|
|
10.8 |
|
|
$ |
55,554 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Life Sciences segment sales increased 4.5% in fiscal year 2008 compared to fiscal year 2007.
Overall, increased pricing in the Medical and BioPharmaceuticals markets contributed 1.8% to sales
growth in the year, and as such, the overall volume increase was 2.7%. Life Sciences represented
approximately 38% of total sales in fiscal year 2008 compared with 39% in fiscal year 2007.
Within Life Sciences, Medical market sales, which represented approximately one-half of Life
Sciences sales, were down 0.9% reflecting a 5.5% decrease in Blood Filtration, the largest market
served by Medical. Increases in the BioSciences and Hospital markets of 3.7% and 4.5%,
respectively, partly mitigated this impact.
The decrease in the Blood Filtration market primarily relates to decreased volume to several
major customers as they have transitioned to alternate suppliers at the natural end of their
contractual commitments or as a result of a new tender process. This has been partially offset with
a price increase. The increase in the BioSciences market was primarily driven by 2.8% growth in
Original Equipment Manufacturer (OEM) sales (contributed by Europe and Asia) and 5.1% growth in
Laboratory sales (contributed by all geographies, with Europe the strongest). The increase in OEM
sales was largely attributable to drug delivery products in France, as well as new business in
Scandinavia. Key growth drivers in the Laboratory market were new product initiatives in life
sciences research and laboratory water. The growth in Hospital sales was primarily driven by
increased Aquasafe and breathing filter sales in the Western Hemisphere and Asia, specifically in
Japan. Company management expects overall Medical sales to increase in the low-single digit range
in fiscal year 2009 compared to fiscal year 2008.
BioPharmaceuticals sales
increased 10.8%, as systems sales increased about 41% compared to
fiscal year 2007, and consumables sales grew 8%. By geography, growth was led by Europe (+15.4%),
the Companys largest geographic BioPharmaceuticals market, accompanied by increases in the Western
Hemisphere (+3.9%) and Asia (+7.8%). The growth in systems sales primarily reflects investment by
the biotechnology sector in the Western Hemisphere and Europe as the Companys Total Fluid
Managementsm strategy presents
many opportunities for growth in the BioPharmaceuticals market. The
growth in consumables sales was attributable to growth in Europe and Asia of approximately 15% and
5%, respectively, partly offset by a decrease of about 4% in the Western Hemisphere caused by sales
downturns and inventory reduction programs in certain large U.S. biotechnology customers. Overall,
key products driving growth are the Companys virus removal filters for biotechnology and plasma
derived therapeutics, its increasing portfolio of single-use processing technologies including the
Kleenpak connector, and its Chromatography portfolio for both systems and consumables. Company
management continued to see strong investment in systems and new manufacturing facilities globally.
Continuing customer investment in new manufacturing capacity is providing future growth
opportunities in consumable sales as these new plants progressively come on stream. For fiscal year
2009, Company management expects double-digit sales growth in the BioPharmaceuticals market
compared to fiscal year 2008.
Life Sciences gross margins increased 60 basis points to 51.5% from 50.9% in fiscal year 2007.
The improvement in gross margins was principally driven by improved pricing that contributed
approximately 80 basis points in margin, a change in market mix within consumables (46% of total
Life Sciences consumable sales were in the higher margin BioPharmaceuticals market compared to
43.5% in fiscal year 2007), an improvement in systems margins and savings generated from cost
reduction initiatives which dampened estimated inflationary pressures on manufacturing and related
overhead costs. These factors were partly offset by a shift in product mix, to a higher percentage
of systems sales (about 5.4% of total Life Sciences sales compared to 3.9% in fiscal year 2007)
which are generally at lower margins than consumables.
SG&A expenses in fiscal year 2008 increased by $14,382, or about 6% (almost 1% in local
currency), compared to fiscal year 2007. SG&A as a percentage of sales decreased to 27% from 28.3%
in fiscal year 2007. The decrease in SG&A as a percentage of sales reflects the impact of the
Companys cost reduction and efficiency initiatives and the leveraging of growth in sales.
R&D expenses were up about 21% (approximately 19% in local currency) at $40,926 compared to
$33,860 in fiscal year 2007. As a percentage of sales, R&D expenses were 4.2% compared to 3.8% in
fiscal year 2007. Increased spending reflects investments in both Medical and BioPharmaceuticals
projects, including prion and cell harvesting.
As a result of the above factors, operating profit dollars increased about 20% to $197,774 and
operating margin improved to 20.3% from 18.8% in fiscal year 2007.
29
Industrial:
Presented below are summary Statements of Operating Profit for the Industrial segment for the
fiscal years ended July 31, 2008 and July 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2008 |
|
|
Sales |
|
|
2007 |
|
|
Sales |
|
Sales |
|
$ |
1,596,414 |
|
|
|
|
|
|
$ |
1,369,718 |
|
|
|
|
|
Cost of sales |
|
|
887,512 |
|
|
|
55.6 |
|
|
|
755,614 |
|
|
|
55.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
708,902 |
|
|
|
44.4 |
|
|
|
614,104 |
|
|
|
44.8 |
|
SG&A |
|
|
432,326 |
|
|
|
27.1 |
|
|
|
381,436 |
|
|
|
27.8 |
|
R&D |
|
|
30,721 |
|
|
|
1.9 |
|
|
|
28,554 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
245,855 |
|
|
|
15.4 |
|
|
$ |
204,114 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and geography within the Industrial segment for the
fiscal years ended July 31, 2008 and July 31, 2007, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy, Water &
Process
Technologies |
|
$ |
981,291 |
|
|
$ |
821,957 |
|
|
|
19.4 |
|
|
$ |
72,644 |
|
|
|
10.6 |
|
Aerospace &
Transportation |
|
|
306,571 |
|
|
|
254,675 |
|
|
|
20.4 |
|
|
|
14,498 |
|
|
|
14.7 |
|
Microelectronics |
|
|
308,552 |
|
|
|
293,086 |
|
|
|
5.3 |
|
|
|
16,438 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,596,414 |
|
|
$ |
1,369,718 |
|
|
|
16.6 |
|
|
$ |
103,580 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
431,068 |
|
|
$ |
398,428 |
|
|
|
8.2 |
|
|
$ |
3,297 |
|
|
|
7.4 |
|
Europe |
|
|
637,533 |
|
|
|
536,094 |
|
|
|
18.9 |
|
|
|
64,388 |
|
|
|
6.9 |
|
Asia |
|
|
527,813 |
|
|
|
435,196 |
|
|
|
21.3 |
|
|
|
35,895 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,596,414 |
|
|
$ |
1,369,718 |
|
|
|
16.6 |
|
|
$ |
103,580 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment sales grew 9% in fiscal year 2008, driven by growth in the Energy, Water &
Process Technologies and Aerospace & Transportation markets, while sales in the Microelectronics
market were down slightly. Overall, increased pricing contributed about 0.5% to the overall sales
growth in the year and as such, the overall volume growth was 8.5%.
Industrial systems sales increased 23.9% compared to fiscal year 2007. The Companys Total
Fluid Managementsm strategy presents many opportunities for growth in this regard. All
markets in Industrial with the exception of the energy-related market contributed to the growth in
systems sales (Municipal Water, Aerospace & Transportation and Food & Beverage markets were the
most significant contributors). Industrial consumables sales grew 6.5%, with all markets
contributing with the exception of Microelectronics. Industrial represented about 62% of total
sales in fiscal year 2008 compared with 61% in fiscal year 2007. Company management expects overall
Industrial sales to increase in the mid-single digit range for all three markets in fiscal year
2009 compared to fiscal year 2008.
Within the Industrial segment, Energy, Water & Process Technologies market sales, which
account for about 61% of the Industrial segment, were up 10.6%, with all markets contributing to
this gain.
30
Municipal Water sales, which are primarily comprised of systems, increased 36.6% compared to
fiscal year 2007, generated by strong growth in all geographies. Sales growth in the Western
Hemisphere of 24.9% was primarily attributable to increasing numbers of surface water treatment
projects driven by government regulations. In Europe, sales growth of 21.8% was driven by surface
water treatment in the United Kingdom, sales of leachate treatment systems to developing countries
in Eastern Europe and North Africa, and OEM cartridge sales in France and Germany. In Asia, sales
increased just over 160% driven by drought-related projects in Australia and sales of leachate
treatment systems in various countries in the region.
Sales in the energy-related market increased 7.8% reflecting growth in consumables in all
geographies partly offset by a decline in systems sales. The decrease in systems sales reflects a
decline in Europe due to particularly strong sales growth last year, partly offset by growth in the
Western Hemisphere and Asia. Market opportunities and growth drivers in the energy-related market
include alternative energy, including wind and coal gasification.
Food and Beverage sales were up 5.5% reflecting double-digit growth in systems sales
(contributed by Europe and Asia) and low-single digit growth in consumables (all geographies
contributing). Sales in Europe, the Companys largest geographic Food & Beverage market, were up
about 4%. Sales growth in Europe reflects the sale of a water system in Hungary and a large sale to
a brewery in Romania to provide for all their filtration needs. In general, key growth drivers in
Europe include sales of OenoFlow product to the wine market, Aria systems for process water and
expanding sales to the beer market. In Asia, sales increased in the low double-digit range
attributable to the overall growth in this region in various countries. In the Western Hemisphere,
sales increased in the low-single digit range.
Sales in the Industrial Manufacturing market increased 10% generated by growth in all
geographies, with the most significant growth achieved in Asia. Demand in the metal and mining
sectors were key growth drivers.
Aerospace & Transportation sales increased 14.7% with all markets contributing to this gain.
The growth in Military sales (+15.4%) was primarily driven by strong growth in Asia, where sales
increased 72.4% primarily related to a large water systems project with the Australian military.
The growth in Military sales in the year also reflects CH-47 helicopter upgrade projects in the
Western Hemisphere. The growth in the Commercial portion of this market (+14.5%) primarily reflects
strong after-market sales and increased OEM sales generated by an increase in airframe build rates.
The increase in the Transportation market (+13.8%) was driven by demand in the construction and
mining equipment sectors.
Microelectronics sales decreased slightly as a decline in the Western Hemisphere was partly
offset by low single-digit growth in Europe as well as in Asia, the Companys largest geographic
Microelectronics market. Overall, the sales decrease in the year reflects tough comparables
against the strong growth achieved in fiscal year 2007 and the current cyclical downturn in the
semiconductor market, which impacted OEM sales. These factors were partly mitigated by sales growth
in the thin film rigid disc, inkjet, solar cell and home server markets.
Industrial gross margins decreased 40 basis points to 44.4% from 44.8% in fiscal year 2007.
The decrease in gross margins reflects the impact of a shift in product mix (systems sales were
16.8% of total Industrial sales compared to 14.6% in fiscal year 2007) and market mix within
consumables, and incremental costs in Europe related to the facilities rationalization initiative.
These negative impacts were partially offset by improved profitability of certain systems sales
(some of which is related to standardization of systems and product portfolio rationalization),
improved pricing that contributed about 20 basis points in margin and the impact of the Companys
manufacturing cost reduction programs, which dampened the estimated inflation of manufacturing
costs.
SG&A expenses increased by $50,890, or about 13% (approximately 6% in local currency) compared
to fiscal year 2007. The increase in SG&A reflects an increase in selling related costs. SG&A
expenses improved to 27.1% as a percentage of sales from 27.8% in fiscal year 2007. The improvement
in SG&A as a percentage of sales reflects the impact of cost reduction and efficiency initiatives
and the leveraging of growth in sales offset by the impact of increased selling expenses.
R&D expenses were up about 8% (approximately 5% in local currency) at $30,721 compared to
$28,554 in fiscal year 2007. As a percentage of sales, R&D expenses were 1.9% compared to 2.1% in
fiscal year 2007. Increased spending in dollars reflects investments in new technologies across
various markets within Industrial.
As a result of the above factors, operating profit dollars increased about 20% to $245,855 and
operating margin was 15.4% compared with 14.9% in fiscal year 2007.
31
Corporate:
Corporate expenses increased by $9,242, or about 21% to $53,960 from $44,718 in fiscal year
2007. The increase in Corporate expenses primarily reflects the addition of tax and treasury
function personnel and increased professional fees related to tax and audit services.
Results of Operations 2007 Compared with 2006
Review of Consolidated Results
Sales for the fiscal year 2007 increased 11.6% to $2.2 billion from $2 billion in fiscal year
2006. Exchange rates increased reported sales by $71,804, primarily due to the weakening of the
U.S. dollar against the Euro, the British Pound and various Asian currencies, partly offset by the
strengthening of the U.S. dollar against the Japanese Yen. In local currency (i.e., had exchange
rates not changed year over year), sales increased 8%. Increased pricing, primarily in the Life
Sciences segment, contributed about 0.5% to overall sales growth in the year.
Life Sciences segment sales increased 7% (in local currency) attributable to growth in both
the BioPharmaceuticals and Medical markets. Industrial segment sales increased 8.7% (in local
currency) with all markets contributing to the growth. Overall systems sales increased 25.8%,
representing 10.4% of total sales in fiscal year 2007 compared to 8.9% in fiscal year 2006,
primarily attributable to strong sales in the Energy, Water & Process Technologies market.
Gross margin, as a percentage of sales, was 47.1% in fiscal year 2007 compared to 46.8% in
fiscal year 2006. The improvement in gross margin reflects an overall increase in pricing of about
0.5%, driven by both segments which contributed approximately 14 basis points to gross margin, and
savings generated from the Companys facilities rationalization initiatives. In fiscal year 2007,
the Company completed the outsourcing and closure of plants in Hamburg and Rostock, Germany and a
plant in Ternay, France and also announced the closure of a plant in Waldstetten, Germany.
Additionally, gross margin has been favorably impacted by the Companys many manufacturing
continuous improvement initiatives, including lean initiatives to improve labor productivity (and,
therefore, reduce labor cost), and cost reduction initiatives focused on procurement improvements
to reduce direct material and freight costs and movement of certain activities to lower cost
countries to also reduce labor costs. In addition, initiatives to improve the profitability of
systems sales included product rationalization of less profitable systems. These factors are partly
offset by the impact of the significant growth in systems sales, which typically have lower margins
than consumables, and incremental costs related to the facilities rationalization initiative that
include incremental depreciation (on assets to be retired earlier than originally estimated) and
training.
SG&A expenses in fiscal year 2007 increased by $33,975, or about 5% (approximately 2% in local
currency). As a percentage of sales, SG&A expenses decreased to 30% from 31.8% in fiscal year 2006
reflecting cost controls combined with increasing sales. The Company continued a major initiative,
begun in fiscal year 2006, to optimize its European operations (EuroPall) with the objective of
delivering improvements in profitability, with much of the benefit showing through in fiscal year
2007. In fiscal year 2007, the Company launched the equivalent of this program in the Western
Hemisphere (AmeriPall). The objectives of these initiatives are to revamp the Companys shared
service and corporate infrastructure to create more efficient operations at a reduced cost.
R&D expenses were $62,414 in fiscal year 2007 compared to $57,371 in fiscal year 2006, up just
under 9% year over year (approximately 7% in local currency). As a percentage of sales, R&D
expenses were 2.8%, on par with fiscal year 2006.
In fiscal year 2007, the Company recorded ROTC of $22,352, primarily related to the Companys
on-going cost reduction initiatives (including its facilities rationalization, EuroPall and
AmeriPall initiatives). The ROTC recorded in fiscal year 2007 was primarily comprised of severance,
impairment charges related to the planned disposal of buildings and early retirement of certain
long-lived assets, and other costs in connection with such initiatives. Additionally, the charges
in fiscal year 2007 include an increase to previously established environmental reserves. Such
charges were partly offset by the gain on the sale of the Companys corporate headquarters, an
insurance settlement related to an environmental matter, and the reversal of excess restructuring
reserves recorded in the accompanying consolidated statement of earnings for fiscal year 2006.
In fiscal year 2006, the Company recorded ROTC of $12,326, primarily comprised of severance
and other costs in connection with the Companys divisional realignment and on-going cost reduction
initiatives (including its facilities rationalization and EuroPall initiatives), partly offset by
the reversal of excess restructuring reserves recorded in fiscal year 2005. In addition, the
charges include an increase to previously established environmental reserves. ROTC also includes a
gain on the sale of the Companys stock rights in Satair A/S (Satair), which was recorded in the
second quarter, as well as a gain on the sale of the Companys investment in Panacos
Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (VITEX), that was recorded in
the first quarter.
32
The details of ROTC for the years ended July 31, 2007 and July 31, 2006 can be found in Note
2, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
EBIT in fiscal year 2007 increased about 28% to $299,585 from $233,353 in fiscal year 2006.
The increase in EBIT reflects the factors discussed above.
Net interest expense in fiscal year 2007 increased to $39,056 from $30,123 in fiscal year
2006. The comparison of net interest expense compared to fiscal year 2006 reflects an increase in
interest expense of approximately $14,600 related to the tax matter (for discussion of tax matter
see Note 2, Audit Committee Inquiry and Restatement, to the consolidated financial statements
included in the 2007 Form 10-K). The impact of a reduction in average net debt levels as compared
to fiscal year 2006 and a slight decrease in interest rates, due to the movement of debt to lower
interest rate countries in the fourth quarter of fiscal year 2006, partly offset the above.
In fiscal year 2007, the Companys effective tax rate was 51.1% as compared to 74.3% in fiscal
year 2006. The decrease in the effective tax rate was primarily due to an incremental provision for
income taxes in fiscal year 2006 related to $398,000 of foreign earnings intended to qualify for
repatriation under the Homeland Investment Act and unpaid intercompany balances that resulted from
sales of products by a foreign subsidiary of the Company to a U.S. subsidiary of the Company that
gave rise to deemed dividend income (see Note 2, Audit Committee Inquiry and Restatement, to the
consolidated financial statements included in the 2007 Form 10-K for further details). These
decreases were partially offset by a charge taken in fiscal year 2007 for the net tax cost of the
anticipated repatriation of approximately $160,000 of foreign earnings which had previously been
asserted to be indefinitely reinvested (see Note 10, Income Taxes, to the accompanying consolidated
financial statements for further details) and a change in estimate in fiscal year 2007 of the
amount of profit the Company expects to derive in Puerto Rico in light of the repeal of benefits
previously realized by the Company under Section 936 of the Internal Revenue Code and attendant
revisions by the IRS of audit practices. See Note 10, Income Taxes, to the accompanying
consolidated financial statements for further details on the components of the Companys effective
tax rate.
Net earnings in fiscal year 2007 were $127,497, or $1.02 per share, compared with net earnings
of $52,140, or 41 cents per share in fiscal year 2006. In summary, the increase in net earnings
reflects the increase in EBIT and a decrease in income taxes as discussed above. These factors were
partly offset by an increase in net interest expense as discussed above. Company management
estimates that foreign currency translation increased net earnings by approximately 4 cents per
share.
Review of Operating Segments
The following table presents sales and operating profit by segment for the fiscal years ended
July 31, 2007 and July 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
% |
|
|
|
2007 |
|
|
Margin |
|
|
2006 |
|
|
Margin |
|
|
Change |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
880,187 |
|
|
|
|
|
|
$ |
796,305 |
|
|
|
|
|
|
|
10.5 |
|
Industrial |
|
|
1,369,718 |
|
|
|
|
|
|
|
1,220,525 |
|
|
|
|
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,249,905 |
|
|
|
|
|
|
$ |
2,016,830 |
|
|
|
|
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences |
|
$ |
165,286 |
|
|
|
18.8 |
|
|
$ |
138,439 |
|
|
|
17.4 |
|
|
|
19.4 |
|
Industrial |
|
|
204,114 |
|
|
|
14.9 |
|
|
|
150,596 |
|
|
|
12.3 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
369,400 |
|
|
|
16.4 |
|
|
|
289,035 |
|
|
|
14.3 |
|
|
|
27.8 |
|
General corporate expenses |
|
|
44,718 |
|
|
|
|
|
|
|
41,689 |
|
|
|
|
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before ROTC,
interest expense, net and
income taxes (a) |
|
|
324,682 |
|
|
|
14.4 |
|
|
|
247,346 |
|
|
|
12.3 |
|
|
|
31.3 |
|
ROTC (a) |
|
|
25,097 |
|
|
|
|
|
|
|
13,993 |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
39,056 |
|
|
|
|
|
|
|
30,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
260,529 |
|
|
|
|
|
|
$ |
203,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in ROTC, for the purposes of evaluation of segment profitability, are other
adjustments recorded in cost of sales of $2,745 and $1,667 for the year ended July 31,
2007 and July 31, 2006, respectively. Such adjustments include incremental depreciation
and other adjustments recorded primarily in conjunction with the Companys facilities
rationalization initiative. |
33
Life Sciences:
Presented below are Summary Statements of Operating Profit for the Life Sciences segment for
the fiscal years ended July 31, 2007 and July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2007 |
|
|
Sales |
|
|
2006 |
|
|
Sales |
|
Sales |
|
$ |
880,187 |
|
|
|
|
|
|
$ |
796,305 |
|
|
|
|
|
Cost of sales |
|
|
432,190 |
|
|
|
49.1 |
|
|
|
401,224 |
|
|
|
50.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
447,997 |
|
|
|
50.9 |
|
|
|
395,081 |
|
|
|
49.6 |
|
SG&A |
|
|
248,851 |
|
|
|
28.3 |
|
|
|
225,054 |
|
|
|
28.3 |
|
R&D |
|
|
33,860 |
|
|
|
3.8 |
|
|
|
31,588 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
165,286 |
|
|
|
18.8 |
|
|
$ |
138,439 |
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and geography within the Life Sciences segment for
the fiscal years ended July 31, 2007 and July 31, 2006, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
475,369 |
|
|
$ |
444,033 |
|
|
|
7.1 |
|
|
$ |
12,900 |
|
|
|
4.2 |
|
BioPharmaceuticals |
|
|
404,818 |
|
|
|
352,272 |
|
|
|
14.9 |
|
|
|
15,466 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
880,187 |
|
|
$ |
796,305 |
|
|
|
10.5 |
|
|
$ |
28,366 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
377,301 |
|
|
$ |
352,027 |
|
|
|
7.2 |
|
|
$ |
243 |
|
|
|
7.1 |
|
Europe |
|
|
391,500 |
|
|
|
335,089 |
|
|
|
16.8 |
|
|
|
26,593 |
|
|
|
8.9 |
|
Asia |
|
|
111,386 |
|
|
|
109,189 |
|
|
|
2.0 |
|
|
|
1,530 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Sciences |
|
$ |
880,187 |
|
|
$ |
796,305 |
|
|
|
10.5 |
|
|
$ |
28,366 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences segment sales increased 7% in fiscal year 2007 compared to fiscal year 2006.
Overall, increased pricing, related to the BioPharmaceuticals market, contributed about 0.5% to
sales growth year over year. Life Sciences represented approximately 39% of total sales in fiscal
year 2007 on par with fiscal year 2006.
Within Life Sciences, Medical market sales, which represented approximately one-half of Life
Sciences sales, increased 4.2%, driven by growth in the Blood Filtration, Hospital and BioSciences
markets. The increase in Blood Filtration sales was driven by the Western Hemisphere, reflecting
vented whole blood filter and Acrodose product sales to independent blood centers in the United
States, as well as increased sales in Canada, and by Europe, primarily reflecting increased sales
to the U.K. blood markets. This increase was partly offset by decreased blood draws in Japan, as
they transition from bedside filtration to blood centers. The growth in the Hospital market
primarily reflects high demand for critical care products in Europe. The increase in the
BioSciences market was driven by growth in Laboratory sales in all geographies as well as growth in
Cell Therapy sales in the Western Hemisphere and Europe.
BioPharmaceuticals sales increased 10.5%, driven by growth in consumables in all geographies
and in systems sales in the Western Hemisphere, somewhat offset by a decline in systems sales in
Europe and Asia. The growth in consumables (+10%) was driven by the vaccine and large-scale
biotechnology sectors, particularly capsules and single-use processing technologies. The growth in
systems sales in the Western Hemisphere reflects the continuing investment by the biotechnology and
vaccine sectors. Systems sales in Europe and Asia were down reflecting the timing of major
projects.
34
Life Sciences gross margins increased to 50.9% in fiscal year 2007 from 49.6% in fiscal year
2006. The improvement in gross margins was principally driven by savings generated from cost
reduction initiatives, primarily the benefits of reduced labor costs from plant automation and
utilization of labor in lower cost countries (primarily reflecting the significant movement of
blood-bank related manufacturing operations to Mexico), as well as procurement initiatives, quality
initiatives aimed at reducing scrap levels, and increased pricing which contributed approximately
18 basis points to gross margin. Furthermore, gross margins also benefited from a change in product
mix, as a larger percentage of sales in fiscal year 2007 were in the higher margin
BioPharmaceuticals market (comprising 46% of total Life Sciences sales compared to 44% in fiscal
year 2006).
SG&A expenses in fiscal year 2007 increased by $23,797, or about 11%. SG&A expenses were 28.3%
as a percentage of sales, on par with fiscal year 2006.
R&D expenses were up about 7% year over year; coming in at $33,860 in fiscal year 2007
compared to $31,588 in fiscal year 2006. As a percentage of sales, R&D expenses were 3.8% compared
to 4% in fiscal year 2006.
As a result of the above factors, operating profit dollars increased approximately 19% to
$165,286 in fiscal year 2007 compared to $138,439 in fiscal year 2006 and operating margin improved
to 18.8% from 17.4%.
Industrial:
Presented below are summary Statements of Operating Profit for the Industrial segment for the
fiscal years ended July 31, 2007 and July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2007 |
|
|
Sales |
|
|
2006 |
|
|
Sales |
|
Sales |
|
$ |
1,369,718 |
|
|
|
|
|
|
$ |
1,220,525 |
|
|
|
|
|
Cost of sales |
|
|
755,614 |
|
|
|
55.2 |
|
|
|
669,859 |
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
614,104 |
|
|
|
44.8 |
|
|
|
550,666 |
|
|
|
45.1 |
|
SG&A |
|
|
381,436 |
|
|
|
27.8 |
|
|
|
374,287 |
|
|
|
30.7 |
|
R&D |
|
|
28,554 |
|
|
|
2.1 |
|
|
|
25,783 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
204,114 |
|
|
|
14.9 |
|
|
$ |
150,596 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below present sales by market and geography within the Industrial segment for the
fiscal years ended July 31, 2007 and July 31, 2006, including the effect of exchange rates for
comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange |
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Rate |
|
|
Local |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
Impact |
|
|
Currency |
|
By Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy,
Water & Process
Technologies |
|
$ |
821,957 |
|
|
$ |
719,605 |
|
|
|
14.2 |
|
|
$ |
31,605 |
|
|
|
9.8 |
|
Aerospace &
Transportation |
|
|
254,675 |
|
|
|
242,624 |
|
|
|
5.0 |
|
|
|
8,453 |
|
|
|
1.5 |
|
Microelectronics |
|
|
293,086 |
|
|
|
258,296 |
|
|
|
13.5 |
|
|
|
3,380 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,369,718 |
|
|
$ |
1,220,525 |
|
|
|
12.2 |
|
|
$ |
43,438 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Geography |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere |
|
$ |
398,428 |
|
|
$ |
375,488 |
|
|
|
6.1 |
|
|
$ |
663 |
|
|
|
5.9 |
|
Europe |
|
|
536,094 |
|
|
|
470,941 |
|
|
|
13.8 |
|
|
|
36,808 |
|
|
|
6.0 |
|
Asia |
|
|
435,196 |
|
|
|
374,096 |
|
|
|
16.3 |
|
|
|
5,967 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
$ |
1,369,718 |
|
|
$ |
1,220,525 |
|
|
|
12.2 |
|
|
$ |
43,438 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment sales grew 8.7% with all markets contributing to this gain. Overall,
pricing was up slightly as improved pricing in the Energy, Water & Process Technologies market was
largely offset by decreased pricing in large volume-based agreements in the Microelectronics market
and decreased pricing in the Aerospace & Transportation market. Industrial systems sales increased
27.6% primarily driven by the Energy, Water & Process Technologies market. Industrial consumables
sales grew 6%. Industrial represented approximately 61% of total sales in fiscal year 2007, on par
with fiscal year 2006.
35
Within the Industrial segment, Energy, Water & Process Technologies sales, which account for
about 60% of the Industrial segment, were up 9.8% driven by increased consumables in all markets
and increased systems sales in all markets with the exception of Food & Beverage.
Sales in the energy-related marketplace increased in the double-digit range, reflecting growth
in consumables and systems sales. All geographies contributed to the growth in systems sales to the
energy-related marketplace, while the growth in consumable sales was driven by Europe and Asia
(consumable sales in the Western Hemisphere were down due to a large sale in fiscal year 2006 which
did not recur in fiscal year 2007). The growth in systems sales to the energy-related marketplace
reflected continued investment by customers in additional capacity via new plants, as well as the
need to address environmental issues and rising energy costs (via alternative energy sources).
Municipal Water sales increased in the double-digit range, driven by growth in all
geographies. Key drivers in Municipal Water sales growth include water scarcity, government
regulations and growing consumer awareness of drinking water safety.
Food and Beverage sales were flat as growth in consumables was offset by a decline in systems
sales, partly related to the product rationalization of less profitable systems in Europe and the
Western Hemisphere.
Sales in the Industrial Manufacturing market were up in the mid-single digit range driven by
growth in the Western Hemisphere and Asia. The increase in the Western Hemisphere reflected growth
in the pulp and paper and lube oil industries, while the increase in Asia reflects growth in the
pulp and paper, automotive and steel industries.
Aerospace & Transportation sales increased 1.5%, primarily attributable to growth in Military
sales in the Western Hemisphere and Asia related to CH-47 helicopters as well as increased OEM
sales (all geographies). The growth in military and OEM sales was partly offset by a double-digit
decline in commercial sales related to the sale of the Companys Western Hemisphere commercial
aerospace distribution arm to Satair in December 2005. This transaction included the one-time sale
of substantial inventory and sales going forward at reduced pricing under the distributor model. In
the fourth quarter of fiscal year 2007, this trend reversed as Satair restocked its depleted
inventory and, as a result, commercial aerospace sales in the Western Hemisphere increased in the
double-digit range.
Microelectronics sales were up 12.2% with all geographies contributing to this gain. Growth in
this market was driven by the strength in the OEM consumer electronics market, particularly in the
flat panel display area, as well as integrated circuit production for the launch of wireless gaming
consoles. Furthermore, sales growth has also benefited from increased demand in the hard disk
storage and ink jet printer markets.
Industrial gross margins decreased to 44.8% in fiscal year 2007 from 45.1% in fiscal year
2006. The decrease in gross margins reflects the significant growth in systems sales (14.6% of
total Industrial sales compared to 12.4% in fiscal year 2006), which are typically at lower
margins, partly offset by the impact of improved profitability of systems sales, and the product
rationalization of less profitable systems as discussed in the consolidated cost of sales review
above. Furthermore, the Companys manufacturing cost reduction programs, such as procurement,
facilities rationalization and lean initiatives, favorably impacted gross margins.
SG&A expenses in fiscal year 2007 increased by $7,149, or about 2%. As a percentage of sales,
SG&A expenses improved to 27.8% in fiscal year 2007 from 30.7% in fiscal year 2006. The improvement
in SG&A as a percentage of sales reflected the impact of cost reduction programs, particularly
EuroPall, and the benefit of increased sales.
R&D expenses were up about 11% year over year; coming in at $28,554 in fiscal year 2007
compared to $25,783 in fiscal year 2006. As a percentage of sales, R&D expenses were 2.1% in fiscal
year 2007, on par with fiscal year 2006.
As a result of the above factors, operating profit dollars increased approximately 35% to
$204,114 in fiscal year 2007 from $150,596 in fiscal year 2006 and operating margin improved to
14.9% from 12.3%.
36
Liquidity and Capital Resources
Non-cash working capital, which is defined as working capital excluding cash and cash
equivalents, notes receivable, notes payable and the current portion of long-term debt, was
approximately $660,000 at July 31, 2008 as compared with $372,400 at July 31, 2007. Non-cash
working capital at July 31, 2008 has been impacted by the adoption of a new accounting standard,
FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). Consistent with the
provisions of FIN No. 48, the Company has reclassified certain tax related assets and liabilities
from current to non-current. Such reclassifications had the effect of increasing non-cash working
capital at July 31, 2008 by approximately $137,000. Accounts receivable days sales outstanding
(DSO) decreased to 73 days from 77 days in the quarter ended April 30, 2008 and 74 days in fiscal
year 2007. The decrease in the overall DSO compared to the quarter ended April 30, 2008 was driven
by a 7 day improvement in the Industrial segment and a 3 day improvement in the Life Sciences
segment. The decrease in the overall DSO compared to fiscal year 2007 was driven by a 2 day
improvement in the Industrial segment, while DSO in Life Sciences was on par with fiscal year 2007.
Inventory turns were 2.7 for the year ended July 31, 2008, on par with the year ended July 31,
2007. Underlying improvements achieved in inventory turns have been offset by the impact of
increased safety stock held related to the facilities rationalization initiative.
The Companys balance sheet is affected by spot exchange rates used to translate local
currency amounts into U.S. dollars. In comparing spot exchange rates at July 31, 2008 to those at
July 31, 2007, the Euro and the Japanese Yen have strengthened against the U.S. dollar, while the
British Pound has weakened against the U.S. dollar. The effect of foreign exchange increased
non-cash working capital by $32,058, including net inventory, net accounts receivable and other
current assets by $15,770, $38,916 and $3,490, respectively, as compared to July 31, 2007.
Additionally, foreign exchange increased accounts payable and other current liabilities by $23,375
and current income tax payable by $2,743.
Net cash provided by operating activities in fiscal year 2008 was $190,806 as compared to net
cash provided by operating activities of $332,928 in fiscal year 2007, a decrease of $142,122. The
decrease in cash flow reflects a tax payment of $135,000 to the IRS and increased taxes paid given
the Companys change in tax position (refer to discussion of taxes under the heading Results of
Operations 2007 Compared with 2006), as well as changes in certain working capital items
particularly accounts receivable, accounts payable and accrued liabilities, partly offset by the
impact of increased net earnings and changes in working capital items particularly, inventory and
other assets. In fiscal year 2009, Company management expects net cash provided by
operating activities to be more than double the fiscal year 2008
result.
Free cash flow, which is defined as net cash provided by operating activities less capital
expenditures, was $66,952 in fiscal year 2008, as compared with $235,165 in fiscal year 2007. The
decrease in free cash flow reflects the decrease in cash provided by operating activities as
discussed above and an increase in capital expenditures. Company management believes this measure
is important because it is a key element of its planning. The Company utilizes free cash flow as
one way to measure its current and future financial performance. The following table reconciles
free cash flow to net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net cash provided by operating activities |
|
$ |
190,806 |
|
|
$ |
332,928 |
|
|
$ |
218,828 |
|
Less capital expenditures |
|
|
123,854 |
|
|
|
97,763 |
|
|
|
95,967 |
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
66,952 |
|
|
$ |
235,165 |
|
|
$ |
122,861 |
|
|
|
|
|
|
|
|
|
|
|
Overall, net debt (debt net of cash and cash equivalents) as a percentage of total
capitalization (net debt plus equity) was 22.1% at July 31, 2008 as compared to 15.2% at July 31,
2007. Net debt increased by approximately $132,000 compared with July 31, 2007 primarily comprised
of an increase in gross debt of $122,400 reflecting the $135,000 deposit with the IRS in September
2007 and a decrease in cash and cash equivalents of $4,300. The impact of foreign exchange rates
also decreased net debt by about $5,300. The Company was in compliance with all financial covenants
of its various debt agreements as of July 31, 2008.
The Company utilizes cash flow generated from operations and its revolving credit facility to
meet its short-term liquidity needs. Company management considers its existing lines of credit,
along with the cash typically generated from operations, to be sufficient to meet its short-term
liquidity needs. For a more detailed discussion of the Companys revolving credit facility, see
Note 8, Notes Payable and Long-Term Debt, to the accompanying consolidated financial statements.
37
Capital expenditures were $123,854 in fiscal year 2008. Capital expenditures reflect spending
on the expansion of existing plants in Puerto Rico, the United States and Europe related to the
facilities rationalization initiative. Depreciation and amortization expense were $84,712 and
$8,493, respectively. For the full fiscal year 2009, Company management expects capital
expenditures to increase compared to fiscal year 2008 by over 30% as the Company completes the
consolidation of its corporate headquarters and other facilities rationalization initiatives.
On October 14, 2004, the Companys board of directors authorized the expenditure of up to
$200,000 for the repurchase of shares of the Companys common stock. On November 15, 2006, the
board of directors authorized an additional expenditure of $250,000 to repurchase shares. At July
31, 2007 there was $348,232 available to be expended under these authorizations. The Company
repurchased stock of $148,850 in fiscal year 2008 and $61,795 in fiscal year 2007. At July 31, 2008
there was $199,382 available to be expended under the current stock repurchase programs. Net
proceeds from stock plans were $18,407 in fiscal year 2008.
The Company increased its quarterly dividend by 8% from 12 to 13 cents per share, effective
with the dividend declared on March 12, 2008, following an increase of 9% to 12 from 11 cents per
share, effective with the dividend declared on January 11, 2007. In fiscal year 2008, the Company
paid dividends of $59,945, an increase of about 7% compared to fiscal year 2007.
The following is a summary of the Companys contractual payment commitments as of July 31,
2008 (Interest on long-term debt includes the amount of interest due to be paid during the
respective fiscal year based upon the amount of debt outstanding as of July 31, 2008):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Total |
|
Long-term debt |
|
$ |
3,252 |
|
|
$ |
86,721 |
|
|
$ |
359,967 |
|
|
$ |
2,800 |
|
|
$ |
282,873 |
|
|
$ |
14,690 |
|
|
$ |
750,303 |
|
Interest on
long-term debt |
|
|
35,550 |
|
|
|
35,256 |
|
|
|
32,523 |
|
|
|
17,761 |
|
|
|
9,218 |
|
|
|
2,156 |
|
|
|
132,464 |
|
Operating leases |
|
|
22,390 |
|
|
|
14,749 |
|
|
|
8,727 |
|
|
|
5,001 |
|
|
|
2,691 |
|
|
|
5,235 |
|
|
|
58,793 |
|
Purchase commitments |
|
|
105,244 |
|
|
|
8,443 |
|
|
|
927 |
|
|
|
406 |
|
|
|
406 |
|
|
|
3,241 |
|
|
|
118,667 |
|
Employment contracts |
|
|
9,288 |
|
|
|
3,489 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,003 |
|
Other commitments |
|
|
3,559 |
|
|
|
752 |
|
|
|
221 |
|
|
|
221 |
|
|
|
221 |
|
|
|
2,845 |
|
|
|
7,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
179,283 |
|
|
$ |
149,410 |
|
|
$ |
402,591 |
|
|
$ |
26,189 |
|
|
$ |
295,409 |
|
|
$ |
28,167 |
|
|
$ |
1,081,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had gross liabilities for unrecognized tax benefits of approximately $242,287 and
related accrued interest of $53,211 as of July 31, 2008, which were excluded from the table above.
See Note 10, Income Taxes, to the accompanying consolidated financial statements for further
discussion of these amounts.
Adoption of New Accounting Pronouncements
In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN No. 48). FIN No. 48 establishes a recognition threshold and measurement process
for recording income tax positions in an enterprises financial statements in accordance with SFAS
No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a two-step evaluation process for
income tax positions. The first step is recognition and, if the recognition threshold is met, a
second step, measurement, is applied. For recognition, an enterprise judgmentally determines
whether it is more-likely-than-not that an income tax position will be sustained upon examination,
including resolution of related appeals or litigation processes, based on the technical merits of
the position. If the income tax position meets the more-likely-than-not recognition threshold it is
measured and the appropriate amount is recognized in the financial statements as the largest amount
of income tax benefit that is greater than 50% likely of being realized. If an income tax position
does not meet the more-likely-than-not recognition threshold, no benefit for that position is
recognized in the financial statements.
Income tax positions that meet the more-likely-than-not recognition threshold at the effective
date of FIN No. 48 may be recognized or, continue to be recognized, upon adoption of FIN No. 48.
The cumulative effect of applying the provisions of FIN No. 48 shall be reported as an adjustment
to the opening balance of retained earnings in the year of adoption. Effective August 1, 2007, the
Company adopted FIN No. 48 and recognized a cumulative effect adjustment of $5,570, reducing its
liability for unrecognized income tax benefits and interest and increasing the August 1, 2007
balance of Retained Earnings. For more details regarding the adoption of FIN No. 48, refer to Note
10, Income Taxes, to the accompanying consolidated financial statements.
38
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning with
fiscal year 2009, except as revised by FASB Staff Position (FSP) FAS No. 157-2, issued in
February 2008. This FSP delays the effective date of SFAS No. 157 for non-financial assets and
non-financial liabilities, except for items that are reorganized or disclosed at fair value in the
financial statements on a periodic basis (at least annually). The Company is in the process of
assessing the effect SFAS No. 157 may have on its consolidated financial statements, but does not
expect that the impact will be material.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to elect to measure specified
financial instruments and certain other items at fair value with changes in fair value recognized
in earnings each reporting period. SFAS No. 159 is effective for the Company beginning with fiscal
year 2009. The Company is in the process of assessing the effect SFAS No. 159 may have on its
consolidated financial statements, but does not expect that the impact will be material.
In June 2007, the FASB ratified EITF No. 07-3, Accounting for Nonrefundable Advance Payments
for Goods or Services Received for Use in Future Research and Development Activities (EITF No.
07-3). EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will
be used or rendered for future research and development activities be deferred and capitalized and
recognized as an expense as the related goods are delivered or the related services are performed.
If an entity does not expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. EITF No. 07-3 is effective, on a prospective basis,
for the Company beginning with fiscal year 2009. The Company is in the process of assessing the
effect EITF No. 07-3 may have on its consolidated financial statements, but does not expect that
the impact will be material.
In June 2007, the FASB ratified EITF No. 06-11, Accounting for Dividends and Related Income
Tax Benefits on Share-Based Payment Awards (EITF No 06-11). EITF No. 06-11 specifies the
accounting treatment for dividends on vesting stock awards and the related income tax benefit of
such dividends. EITF No. 06-11 is to be applied prospectively to the income tax benefits that
result from dividends on equity-classified employee share-based payment awards that are declared in
fiscal years beginning after December 15, 2007. EITF No. 06-11 is effective, on a prospective
basis, for the Company beginning with fiscal year 2009. The Company is in the process of assessing
the effect EITF No. 06-11 may have on its consolidated financial statements, but does not expect
that the impact will be material.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase, and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) is effective for the Company
beginning with fiscal year 2010.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS
No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for the
Company beginning with fiscal year 2010.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires
entities to provide enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 is effective for the
Company beginning with its third quarter of fiscal year 2009. The Company is in the process of
assessing the effect SFAS No. 161 may have on its consolidated financial statements.
39
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP No. 142-3). FSP No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is
effective for the Company beginning with fiscal year 2010. The Company is in the process of
assessing the effect FSP No. 142-3 may have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS No. 162 is effective 60 days following the SECs approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Companys primary market risks relate to adverse changes in foreign currency exchange
rates and interest rates. The sensitivity analyses presented below assume simultaneous shifts in
each respective rate, and quantify the impact on the Companys earnings and cash flows. The changes
used for these analyses reflect the Companys view of changes that are reasonably possible over a
one-year period. Actual changes that differ from the changes used for these analyses could yield
materially different results.
Foreign Currency
The Companys reporting currency is the U.S. dollar. Because the Company operates through
subsidiaries or branches in over thirty countries around the world, its earnings are exposed to
translation risk when the financial statements of the subsidiaries or branches, as stated in their
functional currencies, are translated into the U.S. dollar. Company management estimates that
foreign exchange translation increased earnings per share by 14 cents in fiscal year 2008.
Most of the Companys products are manufactured in the United States, Puerto Rico, Germany and
the United Kingdom, and then sold into many countries. The primary foreign currency exposures
relate to adverse changes in the relationships of the U.S. dollar to the British Pound (the
Pound), the Euro, the Japanese Yen (the Yen), Swiss Franc, the Australian Dollar, the Canadian
Dollar and the Singapore Dollar, as well as adverse changes in the relationship of the Pound to the
Euro. Exposure exists when the functional currency of the buying subsidiaries weakens against the
U.S. dollar, the Pound or the Euro, thus causing an increase of the product cost to the buying
subsidiary or a reduction in the sales price from the selling subsidiary, which adversely affects
the Companys consolidated gross margin and net earnings. The effect of foreign exchange is
partially mitigated because of the significant level of manufacturing done in Europe. In fiscal
year 2008, the Pound, Euro, Yen, Swiss Franc, Australian Dollar, Canadian Dollar and Singapore
Dollar strengthened by approximately 2.3%, 13.6%, 9.4%, 12.7%, 14.6%, 11.4% and 8.4%, respectively,
against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2007.
Additionally, the Euro strengthened against the Pound by approximately 11%. Due to the difficulty
in estimating the economic effect of foreign currency rates, particularly in periods of high
volatility of such rates, Company management does not provide such estimated effects and reports
only the translation effect to earnings per share disclosed above.
The Company is also exposed to transaction risk from adverse changes in exchange rates. These
short-term transaction exposures are primarily Yen, Euro, Pound and Swiss Franc denominated
receivables and payables. These short-term exposures to changing foreign currency exchange rates
are managed by opening forward foreign exchange contracts (forwards) to offset the earnings and
cash flow impact of non-functional currency denominated receivables and payables as well as the
expeditious payment of balances. The Company does not enter into forwards for trading purposes. At July 31, 2008, these
exposures amounted to approximately $111,556 and were offset by forwards with a notional principal
amount of $38,464. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates
as of July 31, 2008, net earnings would have decreased by approximately $4,924, or approximately 4
cents per share.
Interest Rates
The Company is exposed to changes in interest rates, primarily due to its financing and cash
management activities, which include long and short-term debt as well as cash and certain
short-term, highly liquid investments considered to be cash equivalents.
40
The Companys debt portfolio is comprised of both fixed and variable rate borrowings. The
Company manages interest rate exposure by portfolio balancing including employing interest rate
swaps. Including the effect of interest rate swaps, the Companys debt portfolio was approximately
50% variable rate at July 31, 2008, compared to 42% variable rate at July 31, 2007. As of July 31,
2008, the Company had a cash flow interest rate swap (i.e., variable to fixed rate swap) with a
notional amount of $83,421. The fair value of the interest rate swap at July 31, 2008 was a
liability of $432. The cash flows on the above mentioned interest rate swap mirror the cash flows
of the hedged underlying debt instrument. The Company does not enter into interest rate swaps for
trading purposes.
For the year ended July 31, 2008, interest expense, net of interest income, was $32,576. A
hypothetical 10% shift in market interest rates for fiscal year
2008 (e.g., if an assumed market interest rate of 5.0% increased to
5.5%) could have an adverse affect
on interest of approximately $52.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are located immediately following the signature
pages of this Form 10-K. See Item 15 (a)(1) for a listing of financial statements provided.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Full |
|
except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Year |
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
561,007 |
|
|
$ |
625,747 |
|
|
$ |
661,680 |
|
|
$ |
723,211 |
|
|
$ |
2,571,645 |
|
Gross profit |
|
|
261,316 |
|
|
|
288,276 |
|
|
|
322,966 |
|
|
|
338,277 |
|
|
|
1,210,835 |
|
Restructuring and other
charges (gains), net (a) |
|
|
8,769 |
|
|
|
13,859 |
|
|
|
5,495 |
|
|
|
3,415 |
|
|
|
31,538 |
|
Earnings before income taxes |
|
|
56,944 |
|
|
|
69,417 |
|
|
|
93,505 |
|
|
|
105,689 |
|
|
|
325,555 |
|
Net earnings |
|
|
36,102 |
|
|
|
47,988 |
|
|
|
63,274 |
|
|
|
69,915 |
|
|
|
217,279 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.29 |
|
|
|
0.39 |
|
|
|
0.51 |
|
|
|
0.58 |
|
|
|
1.77 |
|
Diluted |
|
|
0.29 |
|
|
|
0.39 |
|
|
|
0.51 |
|
|
|
0.57 |
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
499,288 |
|
|
$ |
544,930 |
|
|
$ |
559,347 |
|
|
$ |
646,340 |
|
|
$ |
2,249,905 |
|
Gross profit |
|
|
223,672 |
|
|
|
256,470 |
|
|
|
277,120 |
|
|
|
302,094 |
|
|
|
1,059,356 |
|
Restructuring and other
(gains) charges, net (a) |
|
|
17,088 |
|
|
|
(3,648 |
) |
|
|
8,620 |
|
|
|
292 |
|
|
|
22,352 |
|
Earnings before income taxes |
|
|
24,279 |
|
|
|
66,879 |
|
|
|
75,996 |
|
|
|
93,375 |
|
|
|
260,529 |
|
Net earnings (loss) |
|
|
16,001 |
|
|
|
44,347 |
|
|
|
50,371 |
|
|
|
16,778 |
|
|
|
127,497 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.13 |
|
|
|
0.36 |
|
|
|
0.41 |
|
|
|
0.14 |
|
|
|
1.04 |
|
Diluted |
|
|
0.13 |
|
|
|
0.36 |
|
|
|
0.40 |
|
|
|
0.13 |
|
|
|
1.02 |
|
|
|
|
(a) |
|
Refer to Note 2, Restructuring and Other Charges, Net, to the accompanying
consolidated financial statements. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys chief executive officer and chief financial officer,
of the effectiveness of the Companys disclosure controls and procedures as of July 31, 2008. Based
on this evaluation, the chief executive officer and chief financial officer concluded that the
Companys disclosure controls and procedures were effective as of such date to ensure that
information required to be disclosed in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
41
INTERNAL CONTROL OVER FINANCIAL REPORTING
(a) Managements annual report on internal control over financial reporting.
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities and Exchange Act of 1934. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. The Companys internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Companys internal control over financial reporting was effective as of July 31,
2008.
42
(b) Attestation report of the registered public accounting firm.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pall Corporation:
We have audited Pall Corporation and subsidiaries internal control over financial reporting as
of July 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pall Corporations
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Managements report on internal control over financial reporting (Item 9A(a)). Our
responsibility is to express an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pall Corporation maintained, in all material respects, effective internal
control over financial reporting as of July 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pall Corporation and
subsidiaries as of July 31, 2008 and 2007, and the related consolidated statements of earnings,
stockholders equity, and cash flows for each of the years in the three-year period ended July 31,
2008 and our report dated September 26, 2008 expressed an unqualified opinion on those consolidated
financial statements.
Melville, New York
September 26, 2008
43
(c) Changes in internal control over financial reporting.
There was no change in the Companys internal control over financial reporting during the
fourth quarter of fiscal year 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(a) Identification of directors:
Information required by this item is included in the Proxy Statement under the captions
Proposal 1 Election of Directors, Structure and Practices of the Board of Directors and
Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated by reference in this
report.
(b) Identification of executive officers:
Information regarding executive officers is contained in Part I, Item 4 of this report,
pursuant to General Instruction G of this form.
* * *
The Company has adopted a code of ethics applicable to its chief executive officer, chief
financial officer, controller and other employees with important roles in the financial reporting
process. The code of ethics is available on the Companys website located at www.pall.com/policies.
In addition, the Company will provide to any person, without charge, upon request, a copy of the
code of ethics, by addressing your request in writing to the Corporate Compliance and Ethics
Officer, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics by posting such
information on the website specified above.
The board of directors has an audit committee, a compensation committee, an executive
committee and a nominating/governance committee. The board of directors has adopted a written
charter for each of these committees and a corporate governance policy. In addition, the Company
has codes of conduct that apply to every employee and its directors. The charters, corporate
governance policy and codes of conduct are available, without charge, on the Companys website
located at www.pall.com or by sending your request in writing to the Corporate Secretary, Pall
Corporation, 2200 Northern Boulevard, East Hills, New York 11548.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement under the caption
Executive Compensation, Director Compensation for
Fiscal Year 2008, Board Committees and
Compensation Committee Report, and is incorporated by reference in this report.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this item is included in the Proxy Statement under the captions
Beneficial Ownership of Common Stock and Restricted Stock Units and Equity Compensation Plans,
and is incorporated by reference in this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item is included in the Proxy Statement under the captions
Proposal 1 Election of Directors, Structure and Practices of the Board of Directors,
Policies and Procedures for Related Person Transactions and Related Person Transactions, and is
incorporated by reference in this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is included in the Proxy Statement under the captions
Audit and Non-Audit Fees and Policy on Audit Committee Pre-Approval of Audit and Permitted
Non-Audit Services, and is incorporated by reference in this report.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of the Form 10-K:
(1) |
|
The following items are filed as part of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets July 31, 2008 and July 31, 2007
Consolidated Statements of Earnings years ended July 31, 2008, July 31, 2007 and July 31, 2006
Consolidated Statements of Stockholders Equity years ended July 31, 2008, July 31, 2007 and July 31, 2006
Consolidated Statements of Cash Flows years ended July 31, 2008, July 31, 2007 and July 31, 2006
Notes to consolidated financial statements |
|
(2) |
|
The following financial statement schedule is filed as part of this report:
Schedule II Valuation and Qualifying Accounts |
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or in the notes thereto.
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference
as part of this report.
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
3.1(i)*
|
|
Restated Certificate of Incorporation of the Registrant as amended through November 23,
1993, filed as Exhibit 3(i) to the Registrants 1994 Form 10-K. |
|
|
|
3.1(ii)*
|
|
By-Laws of the Registrant as amended effective January 17, 2008, filed as Exhibit 3(ii) to
the Registrants Form 8-K filed on January 18, 2008. |
|
|
|
4.1(i)*
|
|
Indenture dated as of August 1, 2002, by and among the Registrant, as Issuer, the
Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee, relating to the
Registrants 6% Senior Notes due August 1, 2012 filed as Exhibit 4(iii) to the Registrants
2002 Form 10-K. |
|
|
|
4.1(ii)*
|
|
First Supplemental Indenture, dated as of October 9, 2007, to the Indenture, dated as of
August 1, 2002, by and among the Registrant, the guarantors named therein and The Bank of New
York, as trustee, filed as Exhibit 4.1 to the Registrants Form 8-K filed on October 11, 2007. |
|
|
|
4.2(i)*
|
|
Rights Agreement dated as of November 17, 1989, between the Registrant and United States
Trust Company of New York, as Rights Agent, filed as an Exhibit to the Registrants Form 8-A
filed on September 10, 1992. |
|
|
|
4.2(ii)*
|
|
Amendment No. 1, dated as of April 20, 1999, to the Rights Agreement dated as of November
17, 1989, between the Registrant and United States Trust Company of New York, as Rights Agent,
filed as Exhibit II to the Registrants Form 8-A/A filed on April 22, 1999. |
|
|
|
|
|
The exhibits filed herewith do not include other instruments with respect to
long-term debt of the Registrant and its subsidiaries, inasmuch as the total amount
of debt authorized under any such instrument does not exceed 10% of the total assets
of the Registrant and its subsidiaries on a consolidated basis. The Registrant
agrees, pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will furnish a
copy of any such instrument to the Securities and Exchange Commission upon request. |
|
|
|
10.1(i)*
|
|
Credit Agreement dated June 21, 2006, between the Registrant and JPMorgan Chase Bank and
the Other Lenders Party Thereto, filed as Exhibit 4(ii) to the Registrants Form 8-K filed on
June 27, 2006. |
46
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.1(ii)*
|
|
First Amendment and Waiver, dated as of August 16, 2007 to the Five-Year Credit
Agreement, dated as of June 21, 2006, among Pall Corporation, the subsidiaries of the Company
named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan
Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London
agent for the Lenders, filed as Exhibit 10 to the Registrants Form 8-K filed on August 20,
2007. |
|
|
|
10.1(iii)*
|
|
Second Amendment and Waiver, dated as of December 7, 2007 to the Five-Year Credit
Agreement, dated as of June 21, 2006, among the Registrant, the subsidiaries of the Registrant
named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan
Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London
agent for the Lenders, filed as Exhibit 10 to the Registrants Form 8-K filed on December 11,
2007. |
|
|
|
10.1(iv)*
|
|
Third Amendment and Waiver, dated as of March 25, 2008 to the Five-Year Credit Agreement,
dated as of June 21, 2006, among the Registrant, the subsidiaries of the Registrant named on
the signature pages thereto, the lenders from time to time party thereto, JPMorgan Chase Bank,
N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London agent for
the Lenders, filed as Exhibit 10.1 (iv) to the Registrants 2007 Form 10-K. |
|
|
|
10.2*
|
|
Employment Agreement dated January 21, 2004, as amended and restated effective July 20,
2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.5 to the Registrants Form
8-K filed on July 25, 2005. |
|
|
|
10.3*
|
|
Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as
Exhibit 10.2 to the Registrants 2003 Form 10-K. |
|
|
|
10.4*
|
|
Amendment dated August 30, 2005 to Employment Agreement dated May 1, 2003 between the
Registrant and Marcus Wilson, filed as Exhibit 10.2 to the Registrants Form 8-K filed on
September 2, 2005. |
|
|
|
10.5*
|
|
Employment Agreement dated April 24, 2008, between the Registrant and Donald B. Stevens,
filed as Exhibit 10 to the Registrants Form 8-K filed on April 28, 2008. |
|
|
|
10.6*
|
|
Employment Agreement dated September 12, 2005 between the Registrant and Roberto Perez,
filed as Exhibit 10.7 to the 2006 Form 10-K. |
|
|
|
10.7*
|
|
Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott, filed as
Exhibit 10.11 to the Registrants 2005 Form 10-K. |
|
|
|
10.8*
|
|
Employment Agreement dated August 1, 2005 between the Registrant and Mary Ann Bartlett,
filed as Exhibit 10.8 to the Registrants 2007 Form 10-K. |
|
|
|
10.9*
|
|
Pall Corporation Supplementary Profit-Sharing Plan as amended effective July 19, 2005, filed
as Exhibit 10.3 to the Registrants Form 8-K filed on July 25, 2005. |
|
|
|
10.10*
|
|
Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998, filed as
Exhibit 10.15 to the Registrants 2002 Form 10-K. |
|
|
|
10.11*
|
|
Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth
and Tax Relief Reconciliation Act of 2001, filed as Exhibit 10.17 to the Registrants 2003
Form 10-K. |
|
|
|
10.12*
|
|
Pall Corporation Supplementary Pension Plan as amended effective August 29, 2005, filed as
Exhibit 10.1 to the Registrants Form 8-K filed on September 2, 2005. |
|
|
|
10.13*
|
|
Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective January 18,
2006, filed as Exhibit 10.15 to the Registrants 2006 Form 10-K. |
|
|
|
10.14*
|
|
Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002, filed as
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended
April 27, 2002. |
|
|
|
10.15*
|
|
Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002, filed as
Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended
April 27, 2002. |
|
|
|
10.16*
|
|
Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002, filed as
Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended
April 27, 2002. |
47
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.17*
|
|
Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002, filed as
Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended
April 27, 2002. |
|
|
|
10.18*
|
|
Form of Notice of Grant of Restricted Stock Units Under Pall Corporation 2005 Stock
Compensation Plan, filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended January 31, 2005. |
|
|
|
10.19*
|
|
Form of Notice of Grant of Annual Award Units Under Pall Corporation 2005 Stock
Compensation Plan, filed as Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended January 31, 2005. |
|
|
|
10.20*
|
|
Form of Notice of Grant of Stock Option Grant Agreement Under Pall Corporation 2005 Stock
Compensation Plan, filed as Exhibit 10.20 to the Registrants 2007 Form 10-K. |
|
|
|
10.21*
|
|
Pall Corporation 2005 Stock Compensation Plan, as amended effective January 19, 2006, filed
as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 2006. |
|
|
|
10.22*
|
|
Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective
November 19, 1998, filed as Exhibit 10.5 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended October 31, 1998. |
|
|
|
10.23*
|
|
Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September
17, 2004, filed as Exhibit 10.25 to the Registrants 2004 Form 10-K. |
|
|
|
10.24*
|
|
Pall Corporation Management Stock Purchase Plan as amended effective July 19, 2005, filed
as Exhibit 10.4 to the Registrants Form 8-K filed on July 25, 2005. |
|
|
|
10.25*
|
|
Pall Corporation Employee Stock Purchase Plan as amended effective October 17, 2003, filed
as Exhibit 10.27 to the Registrants 2003 Form 10-K. |
|
|
|
10.26*
|
|
Principal Rules of the Pall Supplementary Pension Scheme, filed as Exhibit 10.25 to the
Registrants 1995 Form 10-K. |
|
|
|
10.27*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated January 21, 2004, as amended and
restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit
10.28 to the Registrants 2006 Form 10-K. |
|
|
|
10.28*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated January 21, 2004, as amended
and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as
Exhibit 10.29 to the Registrants 2006 Form 10-K. |
|
|
|
10.29*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated May 1, 2003 between the
Registrant and Marcus Wilson, filed as Exhibit 10.30 to the Registrants 2006 Form 10-K. |
|
|
|
10.30*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated May 1, 2003 between the
Registrant and Marcus Wilson, filed as Exhibit 10.31 to the Registrants 2006 Form 10-K. |
|
|
|
10.31*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated November 15, 2001, between the
Registrant and Donald B. Stevens, filed as Exhibit 10.32 to the Registrants 2006 Form 10-K. |
|
|
|
10.32*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated November 15, 2001, between the
Registrant and Donald B. Stevens, filed as Exhibit 10.33 to the Registrants 2006 Form 10-K. |
|
|
|
10.33*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated September 12, 2005, between the
Registrant and Roberto Perez, filed as Exhibit 10.36 to the Registrants 2006 Form 10-K. |
|
|
|
10.34*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated September 12, 2005, between the
Registrant and Roberto Perez, filed as Exhibit 10.37 to the Registrants 2006 Form 10-K. |
|
|
|
10.35*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated June 1, 2004 between the
Registrant and Lisa McDermott, filed as Exhibit 10.38 to the Registrants 2006 Form 10-K. |
|
|
|
10.36*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated June 1, 2004 between the
Registrant and Lisa McDermott, filed as Exhibit 10.39 to the Registrants 2006 Form 10-K. |
|
|
|
10.37*
|
|
Amendment dated May 3, 2006 to Employment Agreement dated August 1, 2005 between the
Registrant and Mary Ann Bartlett, filed as Exhibit 10.37 to the Registrants 2007 Form 10-K. |
48
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.38*
|
|
Letter Agreement, as amended, dated December 11, 2006 between the Registrant and Marcus
Wilson summarizing the terms of the termination of employment of Mr. Wilson, filed as Exhibit
10 to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended October
31, 2006. |
|
|
|
10.39*
|
|
Amendment dated July 18, 2006 to Employment Agreement dated August 1, 2005 between the
Registrant and Mary Ann Bartlett, filed as Exhibit 10.39 to the Registrants 2007 Form 10-K. |
|
|
|
14*
|
|
Pall Corporation Code of Ethics applicable to its Chief Executive Officer, Chief Financial
Officer, Controller and other employees with important roles in the financial reporting
process, filed as Exhibit 99.1 to the Registrants 2004 Form 10-K. |
|
|
|
21
|
|
Subsidiaries of the Registrant. |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Incorporated herein by reference. The Registrants SEC file number is 001- 04311. |
|
|
|
Filed herewith. |
|
|
|
Denotes management contract or compensatory plan or arrangement. |
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
Pall Corporation |
|
|
|
|
|
|
|
|
|
|
|
September 26, 2008
|
|
By:
|
|
/s/
|
|
LISA MCDERMOTT |
|
|
|
|
|
|
|
|
Lisa McDermott,
|
|
|
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
FRANCIS MOSCHELLA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Francis Moschella, |
|
|
|
|
|
|
|
|
Vice President Corporate Controller |
|
|
|
|
|
|
|
|
Chief Accounting Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
/s/
|
|
ERIC KRASNOFF
|
|
Chairman of the Board and
|
|
September 26, 2008 |
|
|
Eric Krasnoff
|
|
Chief
Executive Officer |
|
|
|
|
|
|
|
|
|
/s/
|
|
LISA MCDERMOTT
|
|
Chief Financial Officer and Treasurer
|
|
September 26, 2008 |
|
|
Lisa McDermott
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
FRANCIS MOSCHELLA
|
|
Vice President Corporate Controller
|
|
September 26, 2008 |
|
|
Francis Moschella
|
|
Chief
Accounting Officer |
|
|
|
|
|
|
|
|
|
/s/
|
|
DANIEL J. CARROLL, JR.
|
|
Director
|
|
September 26, 2008 |
|
|
Daniel J. Carroll, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
CHERYL W. GRISÉ
|
|
Director
|
|
September 26, 2008 |
|
|
Cheryl W. Grisé
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
JOHN H. F. HASKELL, JR.
|
|
Director
|
|
September 26, 2008 |
|
|
John H. F. Haskell, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
ULRIC S. HAYNES, JR.
|
|
Director
|
|
September 26, 2008 |
|
|
Ulric S. Haynes, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
DENNIS N. LONGSTREET
|
|
Director
|
|
September 26, 2008 |
|
|
Dennis N. Longstreet
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
EDWIN W. MARTIN, JR.
|
|
Director
|
|
September 26, 2008 |
|
|
Edwin W. Martin, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
KATHARINE L. PLOURDE
|
|
Director
|
|
September 26, 2008 |
|
|
Katharine L. Plourde
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
HEYWOOD SHELLEY
|
|
Director
|
|
September 26, 2008 |
|
|
Heywood Shelley
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
EDWARD L. SNYDER
|
|
Director
|
|
September 26, 2008 |
|
|
Edward L. Snyder
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
EDWARD TRAVAGLIANTI
|
|
Director
|
|
September 26, 2008 |
|
|
Edward Travaglianti
|
|
|
|
|
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pall Corporation:
We have audited the accompanying consolidated balance sheets of Pall Corporation and
subsidiaries as of July 31, 2008 and 2007, and the related consolidated statements of earnings,
stockholders equity, and cash flows for each of the years in the three-year period ended July 31,
2008. In connection with our audits of the consolidated financial statements, we also have audited
the accompanying financial statement schedule. These consolidated financial statements and the
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pall Corporation and subsidiaries as of July 31, 2008
and 2007, and the results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pall Corporation and subsidiaries internal control over financial
reporting as of July 31, 2008, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated September 26, 2008 expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.
As discussed in the notes to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans as of July 31, 2007, Securities and Exchange Commission
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements as of July 31, 2007 and Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes as
of August 1, 2007.
Melville, New York
September 26, 2008
51
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008 |
|
|
July 31, 2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
454,065 |
|
|
$ |
443,036 |
|
Accounts receivable |
|
|
617,079 |
|
|
|
551,393 |
|
Inventories |
|
|
492,977 |
|
|
|
471,467 |
|
Other current assets |
|
|
95,518 |
|
|
|
140,481 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,659,639 |
|
|
|
1,606,377 |
|
Property, plant and equipment, net |
|
|
662,985 |
|
|
|
607,900 |
|
Goodwill |
|
|
265,893 |
|
|
|
260,205 |
|
Intangible assets |
|
|
46,204 |
|
|
|
47,933 |
|
Other non-current assets |
|
|
322,025 |
|
|
|
186,431 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,956,746 |
|
|
$ |
2,708,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
26,062 |
|
|
$ |
39,949 |
|
Accounts payable |
|
|
200,744 |
|
|
|
183,429 |
|
Accrued liabilities |
|
|
270,522 |
|
|
|
315,646 |
|
Income taxes payable |
|
|
57,882 |
|
|
|
291,395 |
|
Current portion of long-term debt |
|
|
3,252 |
|
|
|
1,771 |
|
Dividends payable |
|
|
15,501 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
573,963 |
|
|
|
832,190 |
|
Long-term debt, net of current portion |
|
|
747,051 |
|
|
|
591,591 |
|
Income taxes payable non-current |
|
|
233,420 |
|
|
|
|
|
Deferred income taxes |
|
|
10,979 |
|
|
|
34,966 |
|
Other non-current liabilities |
|
|
252,098 |
|
|
|
189,498 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,817,511 |
|
|
|
1,648,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, par value $.10 per share; 500,000 shares
authorized; 127,958 shares issued |
|
|
12,796 |
|
|
|
12,796 |
|
Capital in excess of par value |
|
|
178,608 |
|
|
|
159,620 |
|
Retained earnings |
|
|
1,118,616 |
|
|
|
974,945 |
|
Treasury stock, at cost (2008 8,717 shares, 2007
5,412 shares) |
|
|
(290,508 |
) |
|
|
(164,454 |
) |
Stock option loans |
|
|
(450 |
) |
|
|
(679 |
) |
Accumulated other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
179,429 |
|
|
|
142,691 |
|
Pension liability adjustment |
|
|
(61,322 |
) |
|
|
(67,036 |
) |
Unrealized investment gains |
|
|
2,343 |
|
|
|
2,801 |
|
Unrealized losses on derivatives |
|
|
(277 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
120,173 |
|
|
|
78,373 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,139,235 |
|
|
|
1,060,601 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,956,746 |
|
|
$ |
2,708,846 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
July 31, 2008 |
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
Net sales |
|
$ |
2,571,645 |
|
|
$ |
2,249,905 |
|
|
$ |
2,016,830 |
|
Cost of sales |
|
|
1,360,810 |
|
|
|
1,190,549 |
|
|
|
1,072,750 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,210,835 |
|
|
|
1,059,356 |
|
|
|
944,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
749,519 |
|
|
|
675,005 |
|
|
|
641,030 |
|
Research and development |
|
|
71,647 |
|
|
|
62,414 |
|
|
|
57,371 |
|
Restructuring and other charges, net |
|
|
31,538 |
|
|
|
22,352 |
|
|
|
12,326 |
|
Interest expense, net |
|
|
32,576 |
|
|
|
39,056 |
|
|
|
30,123 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
325,555 |
|
|
|
260,529 |
|
|
|
203,230 |
|
Provision for income taxes |
|
|
108,276 |
|
|
|
133,032 |
|
|
|
151,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
217,279 |
|
|
$ |
127,497 |
|
|
$ |
52,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.77 |
|
|
$ |
1.04 |
|
|
$ |
0.42 |
|
Diluted |
|
$ |
1.76 |
|
|
$ |
1.02 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
122,445 |
|
|
|
123,115 |
|
|
|
124,931 |
|
Diluted |
|
|
123,686 |
|
|
|
124,393 |
|
|
|
125,819 |
|
See accompanying notes to consolidated financial statements.
53
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Excess |
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Other |
|
|
|
|
|
|
|
|
Years Ended July 31, 2006, |
|
Common |
|
|
of Par |
|
|
Retained |
|
|
Treasury |
|
|
Option |
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
July 31, 2007 and July 31, 2008 |
|
Stock |
|
|
Value |
|
|
Earnings |
|
|
Stock |
|
|
Loans |
|
|
Income/(Loss) |
|
|
Total |
|
|
Income |
|
Balance at August 1, 2005 |
|
$ |
12,796 |
|
|
$ |
121,934 |
|
|
$ |
918,967 |
|
|
$ |
(90,878 |
) |
|
$ |
(1,808 |
) |
|
$ |
31,072 |
|
|
$ |
992,083 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
52,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,140 |
|
|
$ |
52,140 |
|
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,369 |
|
|
|
26,369 |
|
|
|
26,369 |
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,731 |
) |
|
|
(23,731 |
) |
|
|
(23,731 |
) |
Unrealized investment gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,916 |
|
|
|
1,916 |
|
|
|
1,916 |
|
Unrealized loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214 |
) |
|
|
(214 |
) |
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(53,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,801 |
) |
|
|
|
|
Issuance of 1,372 shares for stock plans
and tax benefit related to stock plans |
|
|
|
|
|
|
(699 |
) |
|
|
(7,496 |
) |
|
|
34,830 |
|
|
|
|
|
|
|
|
|
|
|
26,635 |
|
|
|
|
|
Restricted stock units related to
stock plans |
|
|
|
|
|
|
4,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,065 |
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
11,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,865 |
|
|
|
|
|
Purchase of 3,556 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,727 |
) |
|
|
|
|
|
|
|
|
|
|
(100,727 |
) |
|
|
|
|
Stock option loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497 |
|
|
|
|
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
12,796 |
|
|
|
137,165 |
|
|
|
909,810 |
|
|
|
(156,775 |
) |
|
|
(1,311 |
) |
|
|
35,412 |
|
|
|
937,097 |
|
|
|
|
|
Impact of adoption of SAB No. 108 |
|
|
|
|
|
|
|
|
|
|
(5,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 1, 2006 |
|
|
12,796 |
|
|
|
137,165 |
|
|
|
903,853 |
|
|
|
(156,775 |
) |
|
|
(1,311 |
) |
|
|
35,412 |
|
|
|
931,140 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
127,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,497 |
|
|
$ |
127,497 |
|
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,923 |
|
|
|
35,923 |
|
|
|
35,923 |
|
Pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,325 |
|
|
|
26,325 |
|
|
|
26,325 |
|
Unrealized investment gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
852 |
|
|
|
852 |
|
|
|
852 |
|
Unrealized gain on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
138 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially adopt the
provisions of SFAS No. 158 (net of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,277 |
) |
|
|
(20,277 |
) |
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(43,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,345 |
) |
|
|
|
|
Issuance of 1,973 shares for stock plans
and tax benefit related to stock plans |
|
|
|
|
|
|
5,852 |
|
|
|
(13,060 |
) |
|
|
54,116 |
|
|
|
|
|
|
|
|
|
|
|
46,908 |
|
|
|
|
|
Restricted stock units related to stock
plans |
|
|
|
|
|
|
2,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,481 |
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
14,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,122 |
|
|
|
|
|
Purchase of 1,585 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,795 |
) |
|
|
|
|
|
|
|
|
|
|
(61,795 |
) |
|
|
|
|
Stock option loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632 |
|
|
|
|
|
|
|
632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007 |
|
|
12,796 |
|
|
|
159,620 |
|
|
|
974,945 |
|
|
|
(164,454 |
) |
|
|
(679 |
) |
|
|
78,373 |
|
|
|
1,060,601 |
|
|
|
|
|
Impact of adoption of FIN No. 48 (Note 1) |
|
|
|
|
|
|
|
|
|
|
5,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,570 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
217,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,279 |
|
|
$ |
217,279 |
|
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,738 |
|
|
|
36,738 |
|
|
|
36,738 |
|
Pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,714 |
|
|
|
5,714 |
|
|
|
5,714 |
|
Unrealized investment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
(458 |
) |
|
|
(458 |
) |
Unrealized gain on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194 |
) |
|
|
(194 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
259,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(76,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,407 |
) |
|
|
|
|
Issuance of 751 shares for stock plans
and tax benefit related to stock plans |
|
|
|
|
|
|
(2,058 |
) |
|
|
(2,771 |
) |
|
|
22,796 |
|
|
|
|
|
|
|
|
|
|
|
17,967 |
|
|
|
|
|
Restricted stock units related to stock
plans |
|
|
|
|
|
|
4,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,987 |
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
16,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,059 |
|
|
|
|
|
Purchase of 4,056 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148,850 |
) |
|
|
|
|
|
|
|
|
|
|
(148,850 |
) |
|
|
|
|
Stock option loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229 |
|
|
|
|
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2008 |
|
$ |
12,796 |
|
|
$ |
178,608 |
|
|
$ |
1,118,616 |
|
|
$ |
(290,508 |
) |
|
$ |
(450 |
) |
|
$ |
120,173 |
|
|
$ |
1,139,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
July 31, 2008 |
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
217,279 |
|
|
$ |
127,497 |
|
|
$ |
52,140 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges, net |
|
|
1,721 |
|
|
|
21,235 |
|
|
|
12,326 |
|
Depreciation and amortization of long-lived assets |
|
|
93,205 |
|
|
|
93,977 |
|
|
|
95,658 |
|
Non-cash stock compensation |
|
|
16,059 |
|
|
|
14,122 |
|
|
|
11,865 |
|
Excess tax benefits from stock based compensation
arrangements |
|
|
(1,802 |
) |
|
|
(7,929 |
) |
|
|
(1,937 |
) |
Amortization of net proceeds from terminated
interest rate swaps |
|
|
(27 |
) |
|
|
(27 |
) |
|
|
(27 |
) |
Amortization of deferred revenue |
|
|
(2,154 |
) |
|
|
(2,154 |
) |
|
|
(1,256 |
) |
Deferred income taxes |
|
|
(30,840 |
) |
|
|
(17,942 |
) |
|
|
13,352 |
|
Provisions for doubtful accounts |
|
|
2,544 |
|
|
|
2,924 |
|
|
|
2,052 |
|
Changes in operating assets and liabilities, net
of effects of acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(4,996 |
) |
|
|
(47,471 |
) |
|
|
(34,494 |
) |
Accounts receivable |
|
|
(31,996 |
) |
|
|
(16,084 |
) |
|
|
(12,799 |
) |
Income taxes receivable/payable |
|
|
(112,869 |
) |
|
|
115,080 |
|
|
|
72,151 |
|
Accounts payable and accrued expenses |
|
|
(424 |
) |
|
|
54,434 |
|
|
|
3,661 |
|
Other assets |
|
|
27,756 |
|
|
|
(10,739 |
) |
|
|
(7,031 |
) |
Other liabilities |
|
|
17,350 |
|
|
|
6,005 |
|
|
|
13,167 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
190,806 |
|
|
|
332,928 |
|
|
|
218,828 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(123,854 |
) |
|
|
(97,763 |
) |
|
|
(95,967 |
) |
Purchases of retirement benefit assets |
|
|
(26,177 |
) |
|
|
(22,841 |
) |
|
|
(78,187 |
) |
Proceeds from sale of retirement benefit assets |
|
|
23,055 |
|
|
|
22,824 |
|
|
|
43,791 |
|
Disposals of fixed assets |
|
|
10,137 |
|
|
|
47,734 |
|
|
|
9,950 |
|
Proceeds from sale of strategic investments |
|
|
|
|
|
|
|
|
|
|
7,387 |
|
Acquisitions of businesses, net of disposals
and cash acquired |
|
|
|
|
|
|
(406 |
) |
|
|
(75 |
) |
Other |
|
|
(4,848 |
) |
|
|
(4,975 |
) |
|
|
(3,001 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(121,687 |
) |
|
|
(55,427 |
) |
|
|
(116,102 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
|
211,549 |
|
|
|
80,328 |
|
|
|
348,295 |
|
Repayments of long-term debt |
|
|
(82,884 |
) |
|
|
(173,596 |
) |
|
|
(191,487 |
) |
Notes payable |
|
|
(16,420 |
) |
|
|
1,303 |
|
|
|
9,813 |
|
Purchase of treasury stock |
|
|
(148,850 |
) |
|
|
(61,795 |
) |
|
|
(100,727 |
) |
Dividends paid |
|
|
(59,945 |
) |
|
|
(56,228 |
) |
|
|
(52,379 |
) |
Net proceeds from stock plans |
|
|
18,407 |
|
|
|
39,611 |
|
|
|
28,964 |
|
Excess tax benefits from stock based compensation
arrangements |
|
|
1,802 |
|
|
|
7,929 |
|
|
|
1,937 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used)/provided by financing activities |
|
|
(76,341 |
) |
|
|
(162,448 |
) |
|
|
44,416 |
|
|
|
|
|
|
|
|
|
|
|
Cash flow for year |
|
|
(7,222 |
) |
|
|
115,053 |
|
|
|
147,142 |
|
Cash and cash equivalents at beginning of year |
|
|
443,036 |
|
|
|
317,657 |
|
|
|
164,928 |
|
Effect of exchange rate changes on cash |
|
|
18,251 |
|
|
|
10,326 |
|
|
|
5,587 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
454,065 |
|
|
$ |
443,036 |
|
|
$ |
317,657 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
43,287 |
|
|
$ |
34,176 |
|
|
$ |
33,662 |
|
Income taxes paid (net of refunds) |
|
|
231,030 |
|
|
|
48,825 |
|
|
|
64,733 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable |
|
|
|
|
|
|
|
|
|
|
2,539 |
|
See accompanying notes to consolidated financial statements.
55
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1 ACCOUNTING POLICIES AND RELATED MATTERS
The Company
Pall Corporation and its subsidiaries (hereinafter collectively called the Company unless
the context requires otherwise) manufacture and market filtration, purification and separation
products and integrated systems solutions throughout the world to a diverse group of customers. As
discussed in Note 17, Segment Information and Geographies, consistent with the new corporate
structure, management has determined that the Companys reportable segments, that are also its
operating segments, consist of its two vertically integrated businesses: Life Sciences and
Industrial.
The Companys fiscal year ends on July 31, and the Companys fiscal quarters end on October
31, January 31 and April 30.
Presentation and Use of Estimates
The financial statements of the Company are presented on a consolidated basis with its
subsidiaries, substantially all of which are wholly-owned. All significant intercompany balances
and transactions have been eliminated in consolidation.
Financial statements of foreign subsidiaries have been translated into U.S. dollars at
exchange rates as follows: (i) balance sheet accounts at year-end rates, except equity accounts
which are translated at historic rates, and (ii) income statement accounts at weighted average
rates. Translation gains and losses are reflected in stockholders equity, while transaction gains
and losses, which result from the settlement of foreign denominated receivables and payables at
rates that differ from rates in effect at the transaction date, are reflected in earnings.
Transaction losses, net, in fiscal years 2008, 2007 and 2006 amounted to $2,949, $2,266 and $3,180,
respectively.
To prepare the Companys consolidated financial statements in accordance with U.S. generally
accepted accounting principles, management is required to make assumptions that may affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Estimates are used for, but not limited to, inventory
valuation; provisions for doubtful accounts; asset recoverability; depreciable lives of fixed
assets and useful lives of patents and amortizable intangibles; fair value of financial
instruments; income tax assets and liabilities; pension valuations; restructuring and other
charges; valuation of assets acquired and liabilities assumed in business combinations; allocation
to market segments; revenue recognition and liabilities for items such as environmental
remediation. The Company is subject to uncertainties such as the impact of future events, economic,
environmental and political factors, and changes in the business climate; therefore, actual results
may differ from those estimates. When no estimate in a given range is deemed to be better than any
other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the
accounting estimates used in the preparation of the Companys consolidated financial statements
will change as new events occur, as more experience is acquired, as additional information is
obtained and as the Companys operating environment changes. Changes in estimates are made when
circumstances warrant. Such changes and refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of changes in estimates are disclosed in
the notes to the consolidated financial statements.
Cash and Cash Equivalents
All financial instruments purchased with a maturity of three months or less, other than
amounts held in the benefits protection trust, are considered cash equivalents. Cash equivalents
are held until maturity.
56
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Inventories
Inventories are valued at the lower of cost (on the first-in, first-out method) or market.
Investments
Investments (which represent an equity interest of less than 20% and have readily determinable
market values) are considered available-for-sale securities; as such, these investments are carried
at fair value in accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115). Unrealized gains and losses on these securities are reported as
a separate component of stockholders equity until realized from sale or when unrealized losses are
deemed to be other than temporary. Other than temporary losses are recognized in earnings when
management determines that the recoverability of the cost of the investment is unlikely. The
Company considers numerous factors, on a case-by-case basis, in evaluating whether the decline in
market value of an available-for-sale security below cost is other than temporary. Such factors
include, but are not limited to, (i) the length of time and the extent to which the market value
has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of
the investment; and (iii) whether the Companys intent to retain the investment for the period of
time is sufficient to allow for any anticipated recovery in market value. Investments are included
in Other non-current assets in the Consolidated Balance Sheets.
Acquisition Accounting
Acquisitions are accounted for using the purchase method of accounting in accordance with SFAS
No. 141, Business Combinations (SFAS No. 141). SFAS No. 141 requires that the total cost of an
acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed
based upon their respective fair values at the date of acquisition. The allocation of the purchase
price is dependent upon certain valuations and other studies.
Long-Lived Assets
The Company accounts for its goodwill and intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). As such, goodwill is not amortized and is
assessed for impairment at least annually, including whenever events or circumstances indicate
impairment might have occurred. The Company evaluates the recoverability of goodwill using a
two-step impairment test approach at the reporting unit level. In the first step, the overall fair
value for the reporting unit is compared to its book value including goodwill. In the event that
the overall fair value of the reporting unit was determined to be less than the book value, a
second step is performed which compares the implied fair value of the reporting units goodwill to
the book value of the goodwill. The implied fair value for the goodwill is determined based on the
difference between the overall fair value of the reporting unit and the fair value of the net
identifiable assets. If the implied fair value of the goodwill is less than the book value, the
difference is recognized as an impairment. No adjustments resulted from this assessment.
The Companys amortizable intangible assets, which are comprised almost entirely of patented
and unpatented technology and trademarks, are subject to amortization for periods ranging up to 20
years, principally on a straight-line basis. Property, plant and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the respective assets, principally on
the straight-line basis. The estimated useful lives range from 30 to 50 years for buildings, 3 to
10 years for machinery and equipment and 8 to 10 years for furniture and fixtures. Leasehold
improvements are depreciated over the shorter of the remaining life or the remaining lease term and
building improvements are depreciated over the shorter of the remaining life or the remaining lease
term of the building.
The Company periodically reviews its depreciable and amortizable long-lived assets for
impairment whenever events or circumstances indicate that the carrying amount of an asset (or asset
group) may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than
the carrying amount of the asset (or asset group), an impairment loss is recognized as the amount
by which the carrying amount of the asset (or asset group) exceeds its fair value.
57
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Revenue Recognition
Revenue is recognized when title and risk of loss have transferred to the customer and when
contractual terms have been fulfilled. Transfer of title and risk of loss occurs when the product
is delivered in accordance with the contractual shipping terms. In instances where contractual
terms include a provision for customer acceptance, revenue is recognized when either (i) the
Company has previously demonstrated that the product meets the specified criteria for contracts
with acceptance provisions based on either seller or customer-specified objective criteria or (ii)
upon formal acceptance received from the customer for contracts with acceptance provisions where
the product has not been previously demonstrated to meet customer-specified objective criteria.
Revenue for contracts which are accounted for under the percentage of completion method is based
upon the ratio of costs incurred to date compared with estimated total costs to complete. The
cumulative impact of revisions to total estimated costs is reflected in the period of the change,
including anticipated losses.
Stock Plans
The Company currently has four stock-based employee compensation plans (collectively, the
Stock Plans), which are described more fully in Note 14, Common Stock. Effective August 1, 2005,
the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment
(SFAS No. 123(R)), using the modified-prospective-transition method. Under that transition
method, compensation cost recognized for the years ended July 31, 2008, July 31, 2007 and July 31,
2006 include: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of, August 1, 2005, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for the vested portion of
share-based payments granted subsequent to August 1, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R).
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, based on current law and
existing technologies. These accruals are adjusted periodically as facts and circumstances change,
assessment and remediation efforts progress or as additional technical or legal information becomes
available. Costs of future expenditures for environmental remediation obligations are not
discounted to their present value and are expected to be disbursed over an extended period of time.
Accruals for environmental liabilities are included in Accrued liabilities and Other non-current
liabilities in the Consolidated Balance Sheets.
Income Taxes
Taxes on income are provided using the asset and liability method. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for the years in which
the differences are expected to reverse.
For further discussion, refer to Note 10, Income Taxes.
Earnings Per Share
The Consolidated Statements of Earnings present basic and diluted earnings per share. Basic
earnings per share is determined by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings per share
considers the potential effect of dilution on basic earnings per share assuming potentially
dilutive securities that meet certain criteria, such as stock options, were outstanding since
issuance. The treasury stock method is used to determine the dilutive effect of potentially
dilutive securities. Employee stock options and restricted stock units of 1,235, 546 and 910 for
fiscal years 2008, 2007 and 2006, respectively, were not included in the computation of diluted
shares because their effect would have been antidilutive.
58
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following is a reconciliation between basic shares outstanding and diluted shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Basic shares outstanding |
|
|
122,445 |
|
|
|
123,115 |
|
|
|
124,931 |
|
Effect of dilutive securities (a) |
|
|
1,241 |
|
|
|
1,278 |
|
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
123,686 |
|
|
|
124,393 |
|
|
|
125,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Refer to Note 14, Common Stock, for a description of the Companys stock plans. |
Derivative Instruments
The Company accounts for its derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133). SFAS No.
133 establishes accounting and reporting standards for derivative instruments as either assets or
liabilities in the statement of financial position based on their fair values. Changes in the fair
values are reported in earnings or other comprehensive income depending on the use of the
derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and
accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of
a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow
hedges, changes in fair values are recognized in other comprehensive income/(loss). Changes in fair
values related to fair value hedges as well as the ineffective portion of cash flow hedges are
recognized in earnings. Changes in the fair value of the underlying hedged item of a fair value
hedge are also recognized in earnings.
Adoption of New Accounting Pronouncement
In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN No. 48). FIN No. 48 establishes a recognition threshold and measurement process
for recording income tax positions in an enterprises financial statements in accordance with SFAS
No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a two-step evaluation process for
income tax positions. The first step is recognition and, if the recognition threshold is met, a
second step, measurement, is applied. For recognition, an enterprise judgmentally determines
whether it is more-likely-than-not that an income tax position will be sustained upon examination,
including resolution of related appeals or litigation processes, based on the technical merits of
the position. If the income tax position meets the more-likely-than-not recognition threshold it is
measured and the appropriate amount is recognized in the financial statements as the largest amount
of income tax benefit that is greater than 50% likely of being realized. If an income tax position
does not meet the more-likely-than-not recognition threshold, no benefit for that position is
recognized in the financial statements.
Income tax positions that meet the more-likely-than-not recognition threshold at the effective
date of FIN No. 48 may be recognized, or continue to be recognized, upon adoption of FIN No. 48.
The cumulative effect of applying the provisions of FIN No. 48 shall be reported as an adjustment
to the opening balance of retained earnings in the year of adoption. Effective August 1, 2007, the
Company adopted FIN No. 48 and recognized a cumulative effect adjustment of $5,570, reducing its
liability for unrecognized income tax benefits and interest and increasing the August 1, 2007
balance of retained earnings. In addition, consistent with the provisions of FIN No. 48, the Company reclassified $209,664 of income
tax liabilities from current to non-current liabilities because payment of cash is not anticipated within
one year of the balance sheet date. These non-current income tax liabilities are recorded in income taxes payable non-current
in the consolidated balance sheet. For more details regarding the adoption of FIN No. 48, refer to Note 10, Income Taxes.
59
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
NOTE 2 RESTRUCTURING AND OTHER CHARGES, NET
The following tables summarize the restructuring related items and other charges/(gains)
recorded in fiscal years 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Charges/(Gains) |
|
|
|
|
|
|
Restructuring (1) |
|
|
(2) |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to inquiry (2a) |
|
$ |
|
|
|
$ |
19,081 |
|
|
$ |
19,081 |
|
Severance |
|
|
8,814 |
|
|
|
|
|
|
|
8,814 |
|
Other exit costs |
|
|
3,110 |
|
|
|
|
|
|
|
3,110 |
|
Gain on disposal of assets, net |
|
|
(158 |
) |
|
|
(484 |
) |
|
|
(642 |
) |
Environmental matters (2b) |
|
|
|
|
|
|
1,275 |
|
|
|
1,275 |
|
Other |
|
|
|
|
|
|
482 |
|
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,766 |
|
|
|
20,354 |
|
|
|
32,120 |
|
Reversal of excess restructuring reserves |
|
|
(582 |
) |
|
|
|
|
|
|
(582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,184 |
|
|
$ |
20,354 |
|
|
$ |
31,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
11,154 |
|
|
$ |
19,895 |
|
|
$ |
31,049 |
|
Non-cash |
|
|
30 |
|
|
|
459 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,184 |
|
|
$ |
20,354 |
|
|
$ |
31,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
22,840 |
|
|
$ |
|
|
|
$ |
22,840 |
|
Gain on sale and impairment of assets, net |
|
|
(3,219 |
) |
|
|
|
|
|
|
(3,219 |
) |
Other exit costs |
|
|
4,321 |
|
|
|
|
|
|
|
4,321 |
|
Environmental matters (2b) |
|
|
|
|
|
|
644 |
|
|
|
644 |
|
Other |
|
|
1,117 |
|
|
|
(1,076 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,059 |
|
|
|
(432 |
) |
|
|
24,627 |
|
Reversal of excess restructuring reserves |
|
|
(2,275 |
) |
|
|
|
|
|
|
(2,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,784 |
|
|
$ |
(432 |
) |
|
$ |
22,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
17,672 |
|
|
$ |
(628 |
) |
|
$ |
17,044 |
|
Non-cash |
|
|
5,112 |
|
|
|
196 |
|
|
|
5,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,784 |
|
|
$ |
(432 |
) |
|
$ |
22,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
13,562 |
|
|
$ |
|
|
|
$ |
13,562 |
|
Gain on sale of investments (2c) |
|
|
|
|
|
|
(2,200 |
) |
|
|
(2,200 |
) |
Other exit costs |
|
|
3,043 |
|
|
|
|
|
|
|
3,043 |
|
Gain on sale of assets, net |
|
|
(696 |
) |
|
|
|
|
|
|
(696 |
) |
Environmental matters (2b) |
|
|
|
|
|
|
925 |
|
|
|
925 |
|
Other |
|
|
|
|
|
|
(307 |
) |
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
15,909 |
|
|
|
(1,582 |
) |
|
|
14,327 |
|
Reversal of excess restructuring reserves |
|
|
(2,001 |
) |
|
|
|
|
|
|
(2,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,908 |
|
|
$ |
(1,582 |
) |
|
$ |
12,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
13,624 |
|
|
$ |
(1,459 |
) |
|
$ |
12,165 |
|
Non-cash |
|
|
284 |
|
|
|
(123 |
) |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,908 |
|
|
$ |
(1,582 |
) |
|
$ |
12,326 |
|
|
|
|
|
|
|
|
|
|
|
60
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(1) Restructuring:
Following the completion of the integration of the Filtration and Separations Group (FSG),
which was acquired in fiscal year 2002, Company management began a much broader initiative to
examine the overall structure of the Company and the manner in which it conducted business
activities with the objective of increasing revenue growth and achieving cost reduction. This
resulted in a series of restructuring activities, including the realignment of the overall business
structure into vertically integrated businesses, which commenced at the end of fiscal year 2004,
the Companys facilities rationalization initiative and initiative to optimize European operations
(EuroPall), which commenced in fiscal year 2006, and its initiative to optimize Western
Hemisphere operations (AmeriPall), which commenced in fiscal year 2007.
2006:
|
|
|
The Company continued its realignment plan and cost reduction initiatives, including its
facilities rationalization initiative and EuroPall. As a result, the Company recorded
severance liabilities for the termination of certain employees worldwide as well as other
costs related to these initiatives. In addition, the Company recorded a gain on the sale of
assets, primarily related to the sale of a building in the Western Hemisphere as part of
its facilities rationalization initiative. |
2007:
|
|
|
The Company continued its cost reduction initiatives, including its facilities
rationalization and EuroPall initiatives. Furthermore, the Company launched AmeriPall, the
Western Hemisphere equivalent of the EuroPall initiative. As a result, the Company recorded
severance liabilities for the termination of certain employees worldwide as well as other
costs related to these initiatives. |
|
|
|
|
The Company recorded impairment charges of $7,667 related to the planned disposal of
buildings and the early retirement of certain long-lived assets, as part of the Companys
facilities rationalization initiative. Furthermore, the Company recorded a gain on the sale
of its corporate headquarters of $10,886. |
2008:
|
|
|
The Company continued its cost reduction initiatives, including its facilities
rationalization, EuroPall and AmeriPall initiatives. As a result, the Company recorded
severance liabilities for the termination of certain employees worldwide as well as other
costs related to these initiatives. |
The following table summarizes the activity related to restructuring liabilities that were recorded
in fiscal years 2008, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
8,814 |
|
|
$ |
3,110 |
|
|
$ |
11,924 |
|
Utilized |
|
|
(8,059 |
) |
|
|
(2,849 |
) |
|
|
(10,908 |
) |
Other changes (a) |
|
|
220 |
|
|
|
6 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
975 |
|
|
$ |
267 |
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge (b) |
|
$ |
22,083 |
|
|
$ |
4,321 |
|
|
$ |
26,404 |
|
Utilized |
|
|
(6,146 |
) |
|
|
(3,573 |
) |
|
|
(9,719 |
) |
Other changes (a) |
|
|
611 |
|
|
|
9 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007 |
|
|
16,548 |
|
|
|
757 |
|
|
|
17,305 |
|
Utilized |
|
|
(13,994 |
) |
|
|
(727 |
) |
|
|
(14,721 |
) |
Reversal of excess reserves
(c) |
|
|
(297 |
) |
|
|
(65 |
) |
|
|
(362 |
) |
Other changes (a) |
|
|
1,281 |
|
|
|
57 |
|
|
|
1,338 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
3,538 |
|
|
$ |
22 |
|
|
$ |
3,560 |
|
|
|
|
|
|
|
|
|
|
|
61
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
|
|
|
|
Liabilities & |
|
|
|
|
|
|
Severance |
|
|
Other |
|
|
Total |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
13,335 |
|
|
$ |
3,043 |
|
|
$ |
16,378 |
|
Utilized |
|
|
(7,221 |
) |
|
|
(2,900 |
) |
|
|
(10,121 |
) |
Other changes (a) |
|
|
182 |
|
|
|
9 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
6,296 |
|
|
|
152 |
|
|
|
6,448 |
|
Utilized |
|
|
(2,712 |
) |
|
|
(108 |
) |
|
|
(2,820 |
) |
Reversal of excess reserves (c) |
|
|
(1,385 |
) |
|
|
(40 |
) |
|
|
(1,425 |
) |
Other changes (a) |
|
|
126 |
|
|
|
2 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007 |
|
|
2,325 |
|
|
|
6 |
|
|
|
2,331 |
|
Utilized |
|
|
(1,414 |
) |
|
|
(6 |
) |
|
|
(1,420 |
) |
Reversal of excess reserves (c) |
|
|
(56 |
) |
|
|
|
|
|
|
(56 |
) |
Other changes (a) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
851 |
|
|
$ |
|
|
|
$ |
851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Original charge |
|
$ |
17,496 |
|
|
$ |
2,928 |
|
|
$ |
20,424 |
|
Utilized |
|
|
(8,404 |
) |
|
|
(2,739 |
) |
|
|
(11,143 |
) |
Other changes (a) |
|
|
(86 |
) |
|
|
4 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005 |
|
|
9,006 |
|
|
|
193 |
|
|
|
9,199 |
|
Utilized |
|
|
(3,243 |
) |
|
|
(87 |
) |
|
|
(3,330 |
) |
Reversal of excess reserves (c) |
|
|
(1,905 |
) |
|
|
(96 |
) |
|
|
(2,001 |
) |
Other changes (a) |
|
|
57 |
|
|
|
3 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
3,915 |
|
|
|
13 |
|
|
|
3,928 |
|
Utilized |
|
|
(2,531 |
) |
|
|
|
|
|
|
(2,531 |
) |
Reversal of excess reserves (c) |
|
|
(811 |
) |
|
|
(15 |
) |
|
|
(826 |
) |
Other changes (a) |
|
|
31 |
|
|
|
2 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2007 |
|
|
604 |
|
|
|
|
|
|
|
604 |
|
Utilized |
|
|
(442 |
) |
|
|
|
|
|
|
(442 |
) |
Reversal of excess reserves (c) |
|
|
(164 |
) |
|
|
|
|
|
|
(164 |
) |
Other changes (a) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Balance at Jul. 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other changes primarily reflect translation impact. |
|
(b) |
|
Excludes $757 related to pension liabilities. |
|
(c) |
|
Reflects the reversal of excess restructuring reserves originally recorded in fiscal
years 2007, 2006 and 2005. |
(2) Other Charges/(Gains):
(a) Costs related to inquiry:
In fiscal year 2008, the Company recorded costs of $19,081 primarily comprised of legal and
other professional fees related to the audit committees inquiry into the Companys
understatement of its U.S. federal income tax
payments and its provision for income taxes. See Note 2, Audit Committee Inquiry and Restatement,
to the consolidated financial statements included in the 2007 Form 10-K for a description of this
inquiry.
62
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(b) Environmental Matters:
In fiscal year 2006, the Company increased its previously established environmental reserves by
$925 primarily related to environmental matters in Ann Arbor, Michigan and Pinellas Park,
Florida.
In fiscal year 2007, the Company increased its previously established environmental reserves by
$3,394 primarily related to environmental matters in Ann Arbor, Michigan and Pinellas Park,
Florida. Such costs were partly offset by an insurance settlement of $2,750 related to the
environmental matter in Glen Cove, New York.
In fiscal year 2008, the Company increased its environmental reserves by $1,275 primarily related
to environmental matters in Ann Arbor, Michigan and Pinellas Park, Florida.
For more detail regarding environmental matters, please refer to Note 13, Contingencies and
Commitments.
(c) Investments:
In fiscal year 2006, the Company sold all of the 617.5 shares it held in Panacos Pharmaceuticals,
Inc., formerly known as V.I. Technologies, Inc., for total proceeds aggregating $6,783. The cost
basis at the time of the sale, as adjusted by previous impairment charges, was $4,940. As a
result, the Company recorded a gain of $1,806, net of fees and commissions. Furthermore, the
Company sold its stock rights in Satair A/S (Satair) for total proceeds aggregating $641. The
cost basis of the rights at the time of the sale was $247. As a result, the Company recorded a
gain of $394.
For further discussion of the Companys investments, refer to Note 7, Other Current and
Non-current Assets.
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Billed |
|
$ |
572,262 |
|
|
$ |
510,991 |
|
Unbilled |
|
|
55,746 |
|
|
|
52,212 |
|
|
|
|
|
|
|
|
Total |
|
|
628,008 |
|
|
|
563,203 |
|
Less: allowances for doubtful accounts |
|
|
(10,929 |
) |
|
|
(11,810 |
) |
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
617,079 |
|
|
$ |
551,393 |
|
|
|
|
|
|
|
|
Unbilled receivables principally relate to long-term contracts recorded under the
percentage-of-completion method of accounting.
NOTE 4 INVENTORIES
The major classes of inventory, net, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Raw materials and components |
|
$ |
138,146 |
|
|
$ |
136,248 |
|
Work-in-process |
|
|
77,245 |
|
|
|
73,725 |
|
Finished goods |
|
|
277,586 |
|
|
|
261,494 |
|
|
|
|
|
|
|
|
|
|
$ |
492,977 |
|
|
$ |
471,467 |
|
|
|
|
|
|
|
|
63
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Land |
|
$ |
47,900 |
|
|
$ |
46,485 |
|
Buildings and improvements |
|
|
471,910 |
|
|
|
421,556 |
|
Machinery and equipment |
|
|
887,862 |
|
|
|
819,612 |
|
Furniture and fixtures |
|
|
88,449 |
|
|
|
82,634 |
|
|
|
|
|
|
|
|
|
|
|
1,496,121 |
|
|
|
1,370,287 |
|
Less: Accumulated depreciation and amortization |
|
|
(833,136 |
) |
|
|
(762,387 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
662,985 |
|
|
$ |
607,900 |
|
|
|
|
|
|
|
|
NOTE 6 GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill, net of accumulated amortization recorded prior to
adopting SFAS No. 142, allocated by reportable segment, in accordance with SFAS No. 142. For a
discussion regarding a change in the Companys reportable segments, refer to the Note 17, Segment
Information and Geographies.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Life Sciences |
|
$ |
72,629 |
|
|
$ |
69,433 |
|
Industrial |
|
|
193,264 |
|
|
|
190,772 |
|
|
|
|
|
|
|
|
|
|
$ |
265,893 |
|
|
$ |
260,205 |
|
|
|
|
|
|
|
|
The change in the carrying amount of goodwill is primarily attributable to changes in foreign
exchange rates used to translate the goodwill contained in the financial statements of foreign
subsidiaries using the rates at each respective balance sheet date.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Patents and unpatented technology |
|
$ |
85,336 |
|
|
$ |
43,853 |
|
|
$ |
41,483 |
|
Trademarks |
|
|
4,902 |
|
|
|
3,123 |
|
|
|
1,779 |
|
Other |
|
|
5,058 |
|
|
|
2,116 |
|
|
|
2,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
95,296 |
|
|
$ |
49,092 |
|
|
$ |
46,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Patents and unpatented technology |
|
$ |
82,561 |
|
|
$ |
37,369 |
|
|
$ |
45,192 |
|
Trademarks |
|
|
4,818 |
|
|
|
2,671 |
|
|
|
2,147 |
|
Other |
|
|
2,275 |
|
|
|
1,681 |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,654 |
|
|
$ |
41,721 |
|
|
$ |
47,933 |
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks include costs to register new patents and trademarks. Patents also
include expenditures to successfully defend certain patents.
Amortization expense for intangible assets for fiscal years 2008, 2007 and 2006 was $7,887,
$8,183 and $8,463, respectively. Amortization expense is estimated to be approximately $7,391 in
fiscal year 2009, $7,144 in fiscal year 2010, $6,929 in fiscal year 2011, $6,681 in fiscal year
2012 and $3,919 in fiscal year 2013. This forward-looking estimated
amortization expense does not reflect any impact from acquired
intangibles for the acquisition of GeneSystems (refer to Note 18, Subsequent Event).
64
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
NOTE 7 OTHER CURRENT AND NON-CURRENT ASSETS
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Deferred income taxes (a) |
|
$ |
35,914 |
|
|
$ |
53,370 |
|
Income tax receivable |
|
|
2,899 |
|
|
|
16,360 |
|
Prepaid expenses |
|
|
34,026 |
|
|
|
34,135 |
|
Other receivables |
|
|
22,679 |
|
|
|
36,616 |
|
|
|
|
|
|
|
|
|
|
$ |
95,518 |
|
|
$ |
140,481 |
|
|
|
|
|
|
|
|
Other non-current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Deferred income taxes (a) |
|
$ |
92,656 |
|
|
$ |
69,338 |
|
Retirement benefit assets (b) |
|
|
81,918 |
|
|
|
86,244 |
|
Investments (b) |
|
|
4,562 |
|
|
|
5,791 |
|
Prepaid pension expenses (c) |
|
|
4,184 |
|
|
|
6,638 |
|
Prepaid income tax (a) |
|
|
65,985 |
|
|
|
|
|
Income tax receivable (d) |
|
|
51,982 |
|
|
|
|
|
Other |
|
|
20,738 |
|
|
|
18,420 |
|
|
|
|
|
|
|
|
|
|
$ |
322,025 |
|
|
$ |
186,431 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Refer to Note 10, Income Taxes, for further discussion of these amounts. |
|
(b) |
|
Retirement benefit assets are held to satisfy obligations related to certain retirement
benefit plans, which provide benefits to eligible employees in Germany and the U.S. Included
therein are guaranteed investment contracts of $25,618 and $22,195 as of July 31, 2008 and
July 31, 2007, respectively. The guaranteed investment contracts were established to pay for
supplementary retirement benefits related to plans in Germany. The July 31, 2008 and July 31,
2007 consolidated balance sheets reflect related liabilities in the amounts of $52,484 and $55,115,
respectively. |
|
|
|
Also included within retirement benefit assets is a benefits protection trust, with assets
aggregating $57,322 and $57,693 as of July 31, 2008 and July 31, 2007, respectively. The trust
was established for the purpose of satisfying certain supplemental post-employment benefit
obligations in the U.S. for eligible executives in the event of a change of control of the
Company. In addition to holding cash equivalents primarily to satisfy short-term cash
requirements relating to benefit payments, the trust primarily invests in U.S. government
obligations, debt obligations of corporations and financial institutions with high credit
ratings and equity mutual fund shares. Contractual maturity dates of debt securities held by the
trust range from 2008 to 2043. Such debt and equity securities are classified as
available-for-sale and aggregated $54,989 and $55,655 as of July 31, 2008 and July 31, 2007,
respectively. The July 31, 2008 and July 31, 2007
balance sheets reflect retirement benefit
assets held in the trust of $50,740 and $51,469, related to retirement benefit liabilities of
$59,666 and $62,791, respectively. |
|
|
|
Included in investments is the Companys investment in Satair of $4,477 and $5,336, at July 31,
2008 and July 31, 2007, respectively, which is classified as available-for-sale. |
65
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following is a summary of the Companys available-for-sale investments by category at July
31, 2008 and July 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Net |
|
|
|
Cost/ |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
Amortized |
|
|
|
|
|
|
Holding |
|
|
Holding |
|
|
Holding |
|
|
|
Cost Basis |
|
|
Fair Value |
|
|
Gains |
|
|
Losses |
|
|
Gains |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
6,363 |
|
|
$ |
8,570 |
|
|
$ |
3,125 |
|
|
$ |
(918 |
) |
|
$ |
2,207 |
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
15,587 |
|
|
|
16,511 |
|
|
|
943 |
|
|
|
(19 |
) |
|
|
924 |
|
Other U.S.
government |
|
|
10,111 |
|
|
|
10,370 |
|
|
|
331 |
|
|
|
(72 |
) |
|
|
259 |
|
CMO/mortgage-
backed |
|
|
371 |
|
|
|
378 |
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Corporate |
|
|
23,484 |
|
|
|
23,678 |
|
|
|
386 |
|
|
|
(192 |
) |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,916 |
|
|
$ |
59,507 |
|
|
$ |
4,792 |
|
|
$ |
(1,201 |
) |
|
$ |
3,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
5,744 |
|
|
$ |
9,878 |
|
|
$ |
4,134 |
|
|
$ |
|
|
|
$ |
4,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
14,431 |
|
|
|
14,561 |
|
|
|
150 |
|
|
|
(20 |
) |
|
|
130 |
|
Other U.S.
government |
|
|
12,441 |
|
|
|
12,500 |
|
|
|
96 |
|
|
|
(37 |
) |
|
|
59 |
|
CMO/mortgage-
backed |
|
|
576 |
|
|
|
628 |
|
|
|
53 |
|
|
|
(1 |
) |
|
|
52 |
|
Corporate |
|
|
23,440 |
|
|
|
23,464 |
|
|
|
119 |
|
|
|
(95 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,632 |
|
|
$ |
61,031 |
|
|
$ |
4,552 |
|
|
$ |
(153 |
) |
|
$ |
4,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized losses and fair value of the Companys
available-for-sale investments with unrealized losses aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Holding |
|
|
Fair |
|
|
Holding |
|
|
Fair |
|
|
Holding |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
4,051 |
|
|
$ |
918 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,051 |
|
|
$ |
918 |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
696 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
19 |
|
Other U.S.
government |
|
|
3,029 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
3,029 |
|
|
|
72 |
|
CMO/mortgage -
backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
6,745 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
6,745 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,521 |
|
|
$ |
1,201 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14,521 |
|
|
$ |
1,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Holding |
|
|
Fair |
|
|
Holding |
|
|
Fair |
|
|
Holding |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
5,132 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
5,132 |
|
|
|
20 |
|
Other U.S.
government |
|
|
4,875 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
4,875 |
|
|
|
37 |
|
CMO/mortgage - backed |
|
|
446 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
446 |
|
|
|
1 |
|
Corporate |
|
|
11,433 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
11,433 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,886 |
|
|
$ |
153 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,886 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the proceeds and gross gains and losses from the sale of
available-for-sale investments for the years ended July 31, 2008, July 31, 2007 and July 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Proceeds from sales |
|
$ |
15,132 |
|
|
$ |
13,344 |
|
|
$ |
17,905 |
|
Realized gross gains on sales |
|
|
278 |
|
|
|
4 |
|
|
|
2,217 |
|
Realized gross losses on sales |
|
|
31 |
|
|
|
61 |
|
|
|
112 |
|
(c) |
|
Prepaid pension expenses represent the non-current amounts arising from the excess of
cumulative employer contributions over accrued net pension expenses. Refer to Note 12, Pension
and Profit Sharing Plans and Arrangements for further discussion. |
|
(d) |
|
In connection with the adoption of FIN No. 48, non-current income tax receivable as
of July 31, 2008 includes amounts previously reported as current assets and current liabilities as
of July 31, 2007. |
NOTE 8 NOTES PAYABLE AND LONG-TERM DEBT
At July 31, 2008, the Company had available unsecured credit facilities which require no
compensating balances, totaling approximately $232,704. In addition to providing short-term
liquidity and overdraft protection, these facilities also support various programs (such as
guarantee, performance bond and warranty) mandated by customers and other financial exposures
(foreign exchange forward contracts) of the Company. At July 31, 2008, notes payable were $26,062
and an additional $43,263 was committed to various other programs. The weighted average interest
rates on notes payable at the end of fiscal years 2008 and 2007 were 5.9% and 5.4%, respectively.
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Senior revolving credit facility, due in fiscal year 2011 (a) |
|
$ |
356,737 |
|
|
$ |
217,324 |
|
Private placement senior notes, due in fiscal year 2013 (b) |
|
|
280,000 |
|
|
|
280,000 |
|
Yen denominated loan, due in fiscal year 2010 (c) |
|
|
83,421 |
|
|
|
75,969 |
|
Other |
|
|
30,038 |
|
|
|
19,936 |
|
|
|
|
|
|
|
|
|
|
|
750,196 |
|
|
|
593,229 |
|
SFAS No. 133 fair value adjustment, net (d) |
|
|
107 |
|
|
|
133 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
750,303 |
|
|
|
593,362 |
|
Current portion |
|
|
(3,252 |
) |
|
|
(1,771 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
747,051 |
|
|
$ |
591,591 |
|
|
|
|
|
|
|
|
67
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
As more fully described in Note 2, Audit Committee Inquiry and Restatement, to the 2007 Form
10-K, the Company failed to comply with certain representations, warranties and covenants in its
debt agreements including the agreements described in (a), (b) and (c) below including its
inability to timely file its periodic reports with the SEC. The Company entered into amendments
and/or waivers of those agreements. Under the terms of those amendments and covenant waivers, the
Company was obligated to return to compliance with its reporting obligations under the federal
securities laws by March 31, 2008. The Company became compliant with its filing obligations under
the foregoing agreements, as amended, on March 28, 2008.
(a) |
|
On June 21, 2006, the Company and certain wholly-owned subsidiary borrowers, entered into a
multi-currency (U.S.$, Pound, Euro), five-year $500,000 unsecured senior revolving credit
facility with a syndicate of banks, which expires on June 21, 2011. Simultaneously, the
Company and one of its domestic subsidiaries borrowed approximately $445,000 under this
facility and used the proceeds principally (1) to repay the $213,869 of borrowings, accrued
interest and fees due under its then existing $350,000 unsecured senior revolving credit
facility entered into on July 29, 2005, (2) to prepay a 90-day term $200,000 loan plus accrued
interest, (3) to pay various fees associated with the new facility and (4) for general
corporate purposes. The then existing $350,000 unsecured revolving credit facility was
terminated upon execution of the $500,000 revolving credit facility. Letters of credit
outstanding against the $500,000 revolving credit facility as of July 31, 2008 were
approximately $12,684. |
|
|
|
Borrowings under the current facility bear interest at either a variable rate based upon LIBOR
(U.S.$ and £ borrowings) or Euribor (Euro borrowings) or at the prime rate of the Administrative
Agent (U.S.$ borrowing only). The current facility contains customary affirmative and negative
covenants, financial covenants, representations and warranties and events of defaults. The
financial covenants are as follows: |
|
i. |
|
Minimum interest coverage ratio: The Ratio of Earnings Before Net
Interest, Taxes, Depreciation, Amortization and the Non-Cash Portion of
Non-Recurring Charges and Income (EBITDA) to Net Interest Expense shall not be
less than 3.50 to 1.00, computed on the basis of cumulative results for the most
recently ended four consecutive quarters. |
|
|
ii. |
|
Maximum funded debt ratio: The Ratio of Consolidated Funded Debt to
EBITDA shall not exceed 3.50 to 1.00, EBITDA computed on the basis of cumulative
results for the most recently ended four consecutive quarters. |
|
|
The Company is in compliance with these financial covenants. |
|
(b) |
|
On August 6, 2002, the Company completed a private placement offering of $280,000 6% senior
notes due on August 1, 2012. The notes are unsecured and unsubordinated obligations of the
Company and rank pari passu to its other outstanding unsecured and unsubordinated
indebtedness. |
|
(c) |
|
The Company has a loan of Yen 9 billion (approximately $83,421 as of July 31, 2008) which is
due on June 20, 2010. Interest payments are at a variable rate based upon Yen LIBOR. The
Company designated this borrowing as a non-derivative hedge of its net Yen investment in a
Japanese subsidiary. |
|
(d) |
|
Refer to Note 9, Financial Instruments and Risks and Uncertainties, for further discussion of
the Companys hedging activities. |
68
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The aggregate annual maturities of long-term debt during fiscal years 2009 through 2013 are
approximately as follows:
|
|
|
|
|
2009 |
|
$ |
3,252 |
|
2010 |
|
|
86,721 |
|
2011 |
|
|
359,967 |
|
2012 |
|
|
2,800 |
|
2013 |
|
|
282,873 |
|
Interest expense, net, for fiscal years 2008, 2007 and 2006 is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Interest expense(a) |
|
$ |
50,937 |
|
|
$ |
56,837 |
|
|
$ |
40,323 |
|
Interest income |
|
|
18,361 |
|
|
|
17,781 |
|
|
|
10,200 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
32,576 |
|
|
$ |
39,056 |
|
|
$ |
30,123 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For fiscal years 2008, 2007 and 2006, interest expense included $11,470, $22,273 and $7,686,
respectively, related to Income taxes payable. |
NOTE 9 FINANCIAL INSTRUMENTS AND RISKS AND UNCERTAINTIES
The Company is exposed to market risks, such as changes in foreign currency exchange rates and
interest rates. The purpose of the Companys foreign currency hedging program is to reduce the risk
caused by short-term changes in exchange rates. To accomplish this, the Company uses certain
contracts, primarily foreign currency forward contracts (forwards), which minimize cash flow
risks from changes in foreign currency exchange rates. The Company manages interest risk using a
mix of fixed-rate and variable-rate debt. To manage this risk in a cost efficient manner, the
Company enters into interest rate swaps in which the Company agrees to exchange, at specified
intervals, the difference between fixed and variable interest amounts calculated by reference to an
agreed-upon notional principal amount. Derivative instruments are not used for speculative or
trading purposes.
The Company entered into two consecutive, non-concurrent, receive fixed, pay variable fair
value interest rate swap transactions related to the $280,000 private placement 6.00% notes due in
2012. Both transactions had an aggregate notional amount of $230,000 and both were terminated prior
to maturity. The initial swap was entered into in fiscal year 2003 and terminated that same year to
monetize, or realize, gains in the fair market value of the swap. Proceeds, net of accrued interest
due to the Company of $2,667, were $13,467 and are being amortized as a reduction of interest
expense over the remaining life of the underlying indebtedness. The second swap was entered into in
fiscal year 2003 (concurrent with the termination of the first swap) and was terminated in fiscal
year 2005 to effect a decision by management to increase the fixed rate portion of the Companys
debt portfolio in response to changes in the interest rate environment. The cash outlay, augmented
by accrued interest due to the Company of $894, totaled $10,938; such amount being amortized as an
increase to interest expense over the remaining life of the underlying indebtedness. The
unamortized balance of both swaps, netting to $107 at July 31, 2008, is reflected as a realized
adjustment to the carrying value of the underlying indebtedness.
On June 20, 2007, the Company entered into a receive variable, pay fixed interest rate swap
related to the Yen 9 billion loan that matures in June 2010, whereby the Company received payments
at a variable rate based upon Yen LIBOR and made payments at a fixed rate of 1.58% on a notional
amount of Yen 9 billion. As more fully described in Note 2, Audit Committee Inquiry and
Restatement, to the 2007 Form 10-K, the Company failed to comply with certain representations,
warranties and covenants in its debt other financing-related agreements, including this interest
rate swap. The Company entered into amendments and/or waivers of those agreements. Under the terms
of those amendments and waivers, the Company was obligated to return to compliance with its
reporting obligations under the federal securities laws by March 31, 2008. The Company became
compliant with its filing obligations under the foregoing agreements, as amended, on March 28,
2008.
69
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
In June 2005, pursuant to the execution of a Yen 3.5 billion loan from a U.S. dollar
functional Netherlands subsidiary of the Company (PNBV) to a Japanese subsidiary of the Company
(NPL), PNBV entered into a cross currency swap with a financial institution. Under the terms of
the agreement, PNBV made interest payments to the financial institution at a fixed rate, based upon
a notional amount of Yen 3.5 billion. In return, the financial institution made interest payments
to PNBV, at a fixed rate, based upon a $32,154 notional amount (the U.S. dollar equivalent of the
Yen 3.5 billion based upon the spot rate on the date of the closing of this transaction). On
December 12, 2007, the cross currency interest rate swap was settled and the intercompany loan was
repaid. The cross currency swap had a gain of $980 and the Japanese Yen intercompany loan had a
foreign exchange loss of $820. Both of these positions were recorded in the statement of earnings
during the second quarter of fiscal year 2008.
As of July 31, 2008, the Company
had an interest rate swap and forwards outstanding with
notional amounts aggregating $83,421 and $38,464 respectively, whose fair values were a liability
of $432 and $231, respectively. Accumulated other comprehensive income includes $277, net of tax, of cumulative
unrealized losses on its variable to fixed rate interest rate swap (i.e., cash flow hedge).
The credit risk related to the interest rate swaps and the forwards is considered low because
such instruments are entered into only with financial institutions having high credit ratings and
are generally settled on a net basis.
The Company considers the fair value of all non-derivative financial instruments to be not
materially different from their carrying value at year-end.
The Companys cash and cash equivalents are in high-quality securities placed with a wide
array of financial institutions with high credit ratings limiting the Companys exposure to
concentration of credit risks.
The Companys products are sold to a diverse group of customers throughout the world. The
Company is subject to certain risks and uncertainties as a result of changes in general economic
conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and
regulatory developments. The diversity and breadth of the Companys products and geographic
operations mitigate the risk that adverse changes in any event would materially affect the
Companys financial position. Additionally, as a result of the diversity of its customer base, the
Company does not consider itself exposed to concentration of credit risks. These risks are further
minimized by placing credit limits, ongoing monitoring of customers account balances, and
assessment of customers financial strength.
NOTE 10 INCOME TAXES
The components of earnings before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Domestic operations |
|
$ |
27,437 |
|
|
$ |
44,675 |
|
|
$ |
34,200 |
|
Foreign operations |
|
|
298,118 |
|
|
|
215,854 |
|
|
|
169,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
325,555 |
|
|
$ |
260,529 |
|
|
$ |
203,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provisions for income taxes
consist of the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal, state and local |
|
$ |
49,166 |
|
|
$ |
51,620 |
|
|
$ |
91,518 |
|
Foreign |
|
|
78,484 |
|
|
|
79,521 |
|
|
|
49,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,650 |
|
|
|
131,141 |
|
|
|
140,554 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal, state and local |
|
|
(24,326 |
) |
|
|
4,756 |
|
|
|
9,417 |
|
Foreign |
|
|
4,952 |
|
|
|
(2,865 |
) |
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,374 |
) |
|
|
1,891 |
|
|
|
10,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108,276 |
|
|
$ |
133,032 |
|
|
$ |
151,090 |
|
|
|
|
|
|
|
|
|
|
|
70
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
A reconciliation of the provisions for income taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Pretax Earnings |
|
|
2008 |
|
2007 |
|
2006 |
Computed expected tax expense |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of Puerto Rico Section 936 operations |
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
Foreign income and withholding taxes,
net of U.S. foreign tax credits |
|
|
(2.6 |
) |
|
|
6.0 |
|
|
|
41.6 |
|
Taxes on undistributed earnings |
|
|
|
|
|
|
8.5 |
|
|
|
|
|
U.S. tax credits |
|
|
(0.2 |
) |
|
|
(0.6 |
) |
|
|
|
|
Change in valuation allowance |
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.9 |
) |
Other, net |
|
|
1.0 |
|
|
|
2.5 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
33.2 |
% |
|
|
51.1 |
% |
|
|
74.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has two Puerto Rico subsidiaries that are organized as possessions corporations
as defined in Section 936 of the Internal Revenue Code. The Small Business Job Protection Act of
1996 repealed Section 936 of the Internal Revenue Code which provided a tax credit for U.S.
companies with operations in certain U.S. possessions, including Puerto Rico. For Pall Corporation,
the repeal was effective July 31, 2006.
In fiscal year 2007, the Company provided $22,000 of U.S. tax on approximately $160,000 of
undistributed foreign earnings that previously have not been subject to U.S. tax. This provision
resulted in an effective tax rate reconciling item of 8.5%. U.S. tax was not previously provided on
these earnings as they were considered by the Company to be indefinitely reinvested in its foreign
operations. The decision was made to provide taxes for this portion of undistributed foreign
earnings in anticipation of those foreign funds being remitted to the U.S. in the future to fund
tax payments that resulted from the previously announced understatement of U.S. federal income tax
payments. During fiscal year 2008, approximately $100,000 was repatriated under this plan which
resulted in an incremental $2,436 of tax expense.
As of July 31, 2008, the Company has not provided deferred taxes on approximately $485,000 of
undistributed foreign subsidiaries earnings because it intends to invest substantially all such
earnings in its foreign operations indefinitely. The additional U.S. and non-U.S. income and
withholding tax that would arise on the reversal of the temporary differences could be offset, in
part, by tax credits. Because the determination of the amount of available tax credits and the
limitations imposed on the annual utilization of such credits are subject to a highly complex
series of calculations and expense allocations, it is impractical to estimate the amount of net
income and withholding tax that might be payable on the remaining pool of undistributed earnings if
a reversal of temporary differences occurred.
71
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The components of the net deferred tax asset at July 31, 2008 and July 31, 2007, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Tax loss and tax credit carry-forwards |
|
$ |
27,607 |
|
|
$ |
32,821 |
|
Inventories |
|
|
24,682 |
|
|
|
20,514 |
|
Compensation and benefits |
|
|
25,943 |
|
|
|
24,601 |
|
Environmental |
|
|
5,390 |
|
|
|
6,685 |
|
Accrued expenses |
|
|
27,573 |
|
|
|
23,437 |
|
Amortization |
|
|
7,368 |
|
|
|
8,264 |
|
Net pensions |
|
|
43,917 |
|
|
|
43,164 |
|
Other |
|
|
28,798 |
|
|
|
18,060 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
191,278 |
|
|
|
177,546 |
|
Valuation allowance |
|
|
(22,327 |
) |
|
|
(25,112 |
) |
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
168,951 |
|
|
|
152,434 |
|
|
|
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Plant and equipment |
|
|
(36,610 |
) |
|
|
(37,073 |
) |
Undistributed foreign earnings |
|
|
(8,858 |
) |
|
|
(22,065 |
) |
Other |
|
|
(9,540 |
) |
|
|
(8,573 |
) |
|
|
|
|
|
|
|
Total deferred tax liability |
|
|
(55,008 |
) |
|
|
(67,711 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
113,943 |
|
|
$ |
84,723 |
|
|
|
|
|
|
|
|
As of July 31, 2008, the Company had available tax net operating loss, tax capital loss and
tax credit carry forwards subject to expiration as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
|
|
Year of Expiration |
|
Operating |
|
|
Capital |
|
|
Tax Credits |
|
2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2010-2018 |
|
|
4,690 |
|
|
|
4,479 |
|
|
|
4,549 |
|
2019-2027 |
|
|
5,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
10,440 |
|
|
|
4,479 |
|
|
|
4,549 |
|
Indefinite |
|
|
74,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,031 |
|
|
$ |
4,479 |
|
|
$ |
4,549 |
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company has various state net operating loss carryforwards that expire in
varying amounts through fiscal year 2028.
The valuation allowance has been reduced by $2,785 during the fiscal year ended July 31, 2008.
This reduction primarily resulted from the reduction of foreign tax loss carryforwards due to
decreases of foreign statutory tax rates.
In evaluating the reasonableness of the valuation allowance, management assesses whether it is
more likely than not that some portion, or all, of its deferred tax assets will not be realized.
Ultimately, the realization of deferred tax assets is dependent upon generation of sufficient
future taxable income during those periods in which temporary differences become deductible and/or
net operating loss and tax credit carryforwards can be utilized. To this end, management considers
the level of historical taxable income, the scheduled reversal of taxable temporary differences,
tax-planning strategies and projected future taxable income. Based on these considerations,
management believes it is more likely than not that the Company will realize the benefit of its
deferred tax asset, net of the July 31, 2008 valuation allowance.
72
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
As discussed in Note 1, effective August 1, 2007, the Company adopted a new accounting
standard, FIN No. 48, Accounting for Uncertainty in Income Taxes, resulting in a cumulative effect
adjustment of $5,570, reducing its liability for unrecognized income tax benefits and interest and
increasing the August 1, 2007 balance of Retained Earnings. In addition, consistent with the
provisions of FIN No. 48, the Company has reclassified uncertain tax positions from current to
non-current liabilities because payment of cash is not anticipated within one year of the balance
sheet date. The Company had previously recorded its tax contingencies as current liabilities. These
non-current income tax liabilities are recorded in income taxes
payable-non-current in the
consolidated balance sheet.
A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits is as
follows:
|
|
|
|
|
Balance at August 1, 2007 |
|
$ |
210,000 |
|
Increases for tax positions taken during the current year |
|
|
26,232 |
|
Increases for tax positions taken in prior years |
|
|
7,596 |
|
Decreases for tax positions taken in prior years |
|
|
(651 |
) |
Settlements with tax authorities |
|
|
(463 |
) |
Expiration of the statute of limitations |
|
|
(427 |
) |
|
|
|
|
Balance at July 31, 2008 |
|
$ |
242,287 |
|
|
|
|
|
The total amount of net unrecognized tax benefits that would reduce the
effective tax rate, if recognized, was $152,000 at July 31, 2008.
The Company files income tax returns in the United States and multiple foreign jurisdictions
with varying statutes of limitations. In the normal course of business, the Company and its
subsidiaries are subject to examination by various taxing authorities. As of July 31, 2008, the
Company is subject to U.S. federal and state local income tax examinations for the fiscal tax years
ended in 1996 through 2007, and to non-U.S. income tax examinations for the fiscal tax years ended
in 2000 through 2007.
The Company recognizes accrued interest expense related to unrecognized income tax benefits in
interest expense and the balance at the end of a reporting period is recorded in accrued interest
payable on the Companys consolidated balance sheet. Penalties are accrued as part of income tax
expense and the unpaid balance at the end of a reporting period are recorded as part of the current
or non-current reserve for uncertain income tax positions. Upon adoption of FIN No. 48, the Company
had accrued $64,000 for the potential payment of interest and penalties. During the current fiscal
year, $11,470 of interest expense and $1,679 of tax expense related to penalties were recognized in
the statement of earnings. As of July 31, 2008, the Company has accrued $78,183 for the potential
payment of interest and penalties.
Due to the potential resolution of tax examinations and the expiration of various statutes of
limitation, the Company believes that it is reasonably possible that the gross amount of
unrecognized tax benefits may decrease within the next twelve months by a range of zero to $28,000.
In September 2007, the Company deposited $135,000 with the Internal
Revenue Service. A portion of this deposit has been reflected as a reduction of current income taxes payable and interest payable,
with the remainder reflected as prepaid income tax in other non-current assets on the Companys consolidated balance sheet.
The amounts recorded in the consolidated financial statements reflect the Companys current
estimate of income tax liabilities as of July 31, 2008 including interest and penalties. As
previously disclosed in Note 2, Audit Committee Inquiry and Restatement, to the consolidated
financial statements included in the 2007 Form 10-K, the actual amounts due and payable upon final
settlement of the matters that are under review by taxing authorities in the U.S. and other taxing
jurisdictions may differ materially from the Companys estimate. In particular, the Company may be
subject to potential additional penalties that may be asserted by the U.S. and foreign taxing
authorities of up to $129,000, which has not been reflected in the consolidated financial
statements as of July 31, 2008.
73
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
NOTE 11 ACCRUED AND OTHER NON-CURRENT LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Payroll and related taxes |
|
$ |
136,675 |
|
|
$ |
138,299 |
|
Benefits |
|
|
18,075 |
|
|
|
16,123 |
|
Interest payable |
|
|
18,854 |
|
|
|
57,527 |
|
Environmental remediation (a) |
|
|
5,180 |
|
|
|
5,951 |
|
Deferred income taxes |
|
|
3,648 |
|
|
|
3,019 |
|
Other |
|
|
88,090 |
|
|
|
94,727 |
|
|
|
|
|
|
|
|
|
|
$ |
270,522 |
|
|
$ |
315,646 |
|
|
|
|
|
|
|
|
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Retirement benefits |
|
$ |
167,737 |
|
|
$ |
155,699 |
|
Interest payable non-current (b) |
|
|
46,323 |
|
|
|
|
|
Deferred revenue (c) |
|
|
13,821 |
|
|
|
15,975 |
|
Environmental remediation (a) |
|
|
9,569 |
|
|
|
12,176 |
|
Other |
|
|
14,648 |
|
|
|
5,648 |
|
|
|
|
|
|
|
|
|
|
$ |
252,098 |
|
|
$ |
189,498 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For further discussion regarding environmental remediation liabilities refer to Note
13, Contingencies and Commitments. |
|
(b) |
|
In connection with the adoption of FIN No. 48, income taxes payable non-current as of
July 31, 2008 includes certain unrecognized income tax benefits that were previously reported as
current liabilities in income taxes payable as of July 31, 2007. The related interest payable has
been reported as interest payable non-current as of July 31, 2008. |
|
(c) |
|
On December 16, 2005, the Company sold the rights to its Western Hemisphere commercial
aerospace aftermarket distribution channel for the Companys products for a ten-year period
to Satair. The proceeds received for the distribution rights were recorded as deferred
revenue and are being amortized as an increase to sales over the life of the distribution
agreement. |
NOTE 12 PENSION AND PROFIT SHARING PLANS AND ARRANGEMENTS
Pension Plans
The Company provides substantially all domestic and foreign employees with retirement
benefits. Funding policy for domestic plans, which is primarily comprised of a cash balance pension
plan, is in accordance with the Employee Retirement Income Security Act of 1974 (ERISA); for
foreign plans, funding is determined by local tax laws and other regulations. Pension costs charged
to operations totaled $25,363, $30,314 and $32,819 in fiscal years 2008, 2007 and 2006,
respectively.
As of July 31, 2007, the Company adopted the provisions of SFAS No. 158. In accordance with
SFAS No. 158, the Company is required to record the difference between its benefit obligations and
any plan assets of its defined benefit plans. Upon adoption, SFAS No. 158 requires the recognition
of previously unrecognized actuarial gains and losses, prior service costs or credits and net
transition amounts within accumulated other comprehensive income (expense), net of tax.
Additionally, SFAS No. 158 requires companies to measure plan assets and benefit obligations as of
the date of the Companys fiscal year-end statement of financial position, which is July 31. The
Companys defined benefit pension plans are already measured as of July 31; therefore, the
measurement date provisions of SFAS No. 158 did not affect the Companys existing valuation
practices.
74
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table reflects the change in benefit obligations, change in plan assets and
funded status for these plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation beginning of year |
|
$ |
192,017 |
|
|
$ |
184,307 |
|
|
$ |
356,701 |
|
|
$ |
332,120 |
|
Curtailments and settlements |
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
Service cost |
|
|
7,998 |
|
|
|
7,818 |
|
|
|
4,074 |
|
|
|
3,941 |
|
Interest cost |
|
|
11,586 |
|
|
|
11,051 |
|
|
|
19,044 |
|
|
|
16,493 |
|
Plan participant contributions |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Plan amendments |
|
|
962 |
|
|
|
2,011 |
|
|
|
(1,871 |
) |
|
|
|
|
Actuarial gain |
|
|
(9,311 |
) |
|
|
(2,132 |
) |
|
|
(34,819 |
) |
|
|
(14,789 |
) |
Total benefits paid |
|
|
(12,566 |
) |
|
|
(11,038 |
) |
|
|
(13,657 |
) |
|
|
(10,945 |
) |
Plan transfer |
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
4,852 |
|
Effect of exchange rates |
|
|
|
|
|
|
|
|
|
|
7,983 |
|
|
|
25,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation end of year |
|
|
190,686 |
|
|
|
192,017 |
|
|
|
337,206 |
|
|
|
356,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year |
|
|
134,085 |
|
|
|
124,071 |
|
|
|
258,815 |
|
|
|
206,624 |
|
Actual return on plan assets |
|
|
(7,614 |
) |
|
|
17,495 |
|
|
|
(14,098 |
) |
|
|
21,734 |
|
Company contributions |
|
|
3,465 |
|
|
|
3,557 |
|
|
|
11,929 |
|
|
|
11,599 |
|
Plan participant contributions |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Benefits paid from plan assets |
|
|
(12,566 |
) |
|
|
(11,038 |
) |
|
|
(13,657 |
) |
|
|
(10,945 |
) |
Plan transfer |
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
13,264 |
|
Effect of exchange rates |
|
|
|
|
|
|
|
|
|
|
(818 |
) |
|
|
16,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets end of year |
|
|
117,370 |
|
|
|
134,085 |
|
|
|
242,384 |
|
|
|
258,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (a) |
|
$ |
(73,316 |
) |
|
$ |
(57,932 |
) |
|
$ |
(94,822 |
) |
|
$ |
(97,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
171,095 |
|
|
$ |
171,629 |
|
|
$ |
327,541 |
|
|
$ |
346,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plans with accumulated benefit obligations in excess
of plan assets consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
149,985 |
|
|
$ |
53,504 |
|
|
$ |
322,402 |
|
|
$ |
320,841 |
|
Projected benefit obligation |
|
|
169,576 |
|
|
|
61,271 |
|
|
|
330,478 |
|
|
|
328,679 |
|
Plan assets at fair value |
|
|
92,405 |
|
|
|
|
|
|
|
236,336 |
|
|
|
232,852 |
|
|
|
|
(a) |
|
The Company has certain supplemental defined benefit plans, which provide
benefits to eligible executives in the U.S. and employees abroad. As such, the above
tables do not include the Companys assets relating to these plans of $49,719 and
$50,318 for the U.S. plans and $25,618 and $22,195 for the foreign plans as of July
31, 2008 and July 31, 2007, respectively. Liabilities, included in the tables above,
related to these plans were $58,362 and $61,156 for the U.S. plans and $52,484 and
$55,115 for the foreign plans as of July 31, 2008 and July 31, 2007, respectively. |
75
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Amounts recognized in the balance sheet consists of: |
Non-current assets |
|
$ |
3,855 |
|
|
$ |
6,486 |
|
|
$ |
329 |
|
|
$ |
152 |
|
Current liabilities |
|
|
(2,985 |
) |
|
|
(3,839 |
) |
|
|
(1,884 |
) |
|
|
(1,688 |
) |
Non-current liabilities |
|
|
(74,186 |
) |
|
|
(60,579 |
) |
|
|
(93,267 |
) |
|
|
(96,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(73,316 |
) |
|
$ |
(57,932 |
) |
|
$ |
(94,822 |
) |
|
$ |
(97,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for the Companys defined benefit pension plans includes the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
7,998 |
|
|
$ |
7,818 |
|
|
$ |
7,511 |
|
|
$ |
4,074 |
|
|
$ |
3,941 |
|
|
$ |
6,774 |
|
Interest cost |
|
|
11,586 |
|
|
|
11,051 |
|
|
|
9,471 |
|
|
|
19,044 |
|
|
|
16,493 |
|
|
|
13,621 |
|
Expected return on plan assets |
|
|
(8,760 |
) |
|
|
(8,497 |
) |
|
|
(6,288 |
) |
|
|
(15,862 |
) |
|
|
(13,074 |
) |
|
|
(10,745 |
) |
Amortization of prior service cost |
|
|
1,221 |
|
|
|
1,115 |
|
|
|
952 |
|
|
|
256 |
|
|
|
612 |
|
|
|
439 |
|
Amortization of net transition asset |
|
|
|
|
|
|
(42 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
|
|
1,869 |
|
|
|
2,315 |
|
|
|
2,857 |
|
|
|
4,399 |
|
|
|
8,582 |
|
|
|
7,954 |
|
(Gain)/loss due to curtailments and
settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
13,914 |
|
|
$ |
13,760 |
|
|
$ |
14,461 |
|
|
$ |
11,449 |
|
|
$ |
16,554 |
|
|
$ |
18,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income
for the year ending July 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
Net actuarial loss (gain) |
|
$ |
7,063 |
|
|
$ |
(4,824 |
) |
Recognized actuarial gain |
|
|
(1,869 |
) |
|
|
(4,399 |
) |
Prior service cost (credit) |
|
|
962 |
|
|
|
(1,871 |
) |
Recognized prior service credit |
|
|
(1,221 |
) |
|
|
(256 |
) |
Effect of exchange rates on amounts included in accumulated other
comprehensive income |
|
|
|
|
|
|
(438 |
) |
|
|
|
|
|
|
|
Total recognized in other comprehensive loss/(income) (before tax effects) |
|
$ |
4,935 |
|
|
$ |
(11,788 |
) |
|
|
|
|
|
|
|
Total recognized in other comprehensive loss/(income), net of tax effects |
|
$ |
2,886 |
|
|
$ |
(8,600 |
) |
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive
loss/(income) (before tax effects) |
|
$ |
18,849 |
|
|
$ |
(339 |
) |
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive
loss/(income), net of tax effects |
|
$ |
11,791 |
|
|
$ |
(820 |
) |
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income as of July 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
U.S. Plans |
|
|
Plans |
|
|
Total |
|
Prior service cost |
|
$ |
7,802 |
|
|
$ |
1,044 |
|
|
$ |
8,846 |
|
Net actuarial loss |
|
|
32,722 |
|
|
|
52,765 |
|
|
|
85,487 |
|
|
|
|
|
|
|
|
|
|
|
Total amounts recognized in
accumulated other comprehensive
income |
|
$ |
40,524 |
|
|
$ |
53,809 |
|
|
$ |
94,333 |
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income as of July 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
U.S. Plans |
|
|
Plans |
|
|
Total |
|
Prior service cost |
|
$ |
8,061 |
|
|
$ |
2,955 |
|
|
$ |
11,016 |
|
Net actuarial loss |
|
|
27,528 |
|
|
|
62,642 |
|
|
|
90,170 |
|
|
|
|
|
|
|
|
|
|
|
Total amounts recognized in
accumulated other comprehensive
income |
|
$ |
35,589 |
|
|
$ |
65,597 |
|
|
$ |
101,186 |
|
|
|
|
|
|
|
|
|
|
|
76
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Amounts in accumulated other comprehensive income expected to be amortized as components of
net periodic benefit cost during fiscal year 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
U.S. Plans |
|
|
Plans |
|
|
Total |
|
Prior service cost |
|
$ |
1,538 |
|
|
$ |
195 |
|
|
$ |
1,733 |
|
Net actuarial loss |
|
$ |
1,056 |
|
|
$ |
1,489 |
|
|
$ |
2,545 |
|
The following table provides the weighted-average assumptions used to determine benefit
obligations and net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
|
Foreign Plans |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Assumptions used to
determine benefit
obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
5.92 |
% |
|
|
5.40 |
% |
|
|
4.83 |
% |
Rate of compensation increase |
|
|
4.69 |
% |
|
|
4.68 |
% |
|
|
4.68 |
% |
|
|
3.15 |
% |
|
|
2.94 |
% |
|
|
2.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to
determine net periodic
benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
5.25 |
% |
|
|
5.40 |
% |
|
|
4.83 |
% |
|
|
4.51 |
% |
Expected long-term rate of
return on plan assets |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
6.44 |
% |
|
|
6.47 |
% |
|
|
6.42 |
% |
Rate of compensation increase |
|
|
4.68 |
% |
|
|
4.68 |
% |
|
|
3.67 |
% |
|
|
2.94 |
% |
|
|
2.93 |
% |
|
|
3.79 |
% |
The Company determines its actuarial assumptions on an annual basis. To develop the expected
long-term rate of return on plan assets assumption, the Company considers the current level of
expected returns on risk free investments (primarily government bonds), the historical level of the
risk premium associated with the other asset classes in which the portfolio is invested and the
expectations for future returns of each asset class. The expected return for each asset class was
then weighted based upon the target asset allocation to develop the expected long-term rate of
return on plan assets assumption for the portfolio.
The following table provides the Companys weighted average target plan asset allocation and
actual asset allocation by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Target |
|
|
Actual |
|
|
Actual |
|
|
|
Allocation |
|
|
Allocation |
|
|
Allocation |
|
Equity securities |
|
|
56 |
% |
|
|
54 |
% |
|
|
63 |
% |
Debt securities |
|
|
30 |
% |
|
|
31 |
% |
|
|
26 |
% |
Other |
|
|
14 |
% |
|
|
15 |
% |
|
|
11 |
% |
The Companys investment objective for defined benefit plan assets is to meet the plans
benefit obligations, while preserving plan assets. The investment strategies focus on asset class
diversification, liquidity to meet benefit payments and an appropriate balance of long-term return
and risk. Plan assets are diversified across several investment managers and are generally invested
in liquid funds that track broad market equity and bond indices. Plan fiduciaries oversee the
investment allocation process, which includes selecting investment managers, commissioning periodic
asset-liability studies, setting long-term strategic targets and monitoring asset allocations.
Managements estimate of the Companys cash requirements for the defined benefit plans for the
year ending July 31, 2009 is $17,314. This is comprised of expected benefit payments of $6,502,
which will be paid directly to plan participants from Company assets, as well as expected Company
contributions of $10,812. Expected contributions are dependent on many variables, including the
variability of the market value of the assets as compared to the obligation and other market or
regulatory conditions. Accordingly, actual funding may differ greatly from current estimates.
77
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table provides the pension benefits expected to be paid to participants, which
include payments funded from the Companys assets, as discussed above, as well as payments paid
from plan assets:
|
|
|
|
|
Expected pension benefit payments |
|
|
|
|
2009 |
|
$ |
25,412 |
|
2010 |
|
|
26,626 |
|
2011 |
|
|
28,407 |
|
2012 |
|
|
29,935 |
|
2013 |
|
|
36,975 |
|
2014-2018 |
|
|
172,301 |
|
Defined Contribution Plans
The Companys 401(k) and profit sharing plan covers substantially all domestic employees of
the Company and its participating subsidiaries, other than those employees covered by a union
retirement plan. The Plan provides that participants may voluntarily contribute a percentage of
their compensation and the Company will make a matching contribution equal to 100% of the first 3%
of each participants contributions. The expense associated with the plan for fiscal years 2008,
2007, and 2006 was $6,038, $4,636 and $5,392, respectively.
The Company and its subsidiaries also participate in defined contribution pension plans
primarily for the benefit of certain foreign employees. The expense associated with these plans was
$10,084, $7,809 and $5,445 for fiscal years 2008, 2007 and 2006, respectively.
NOTE 13 CONTINGENCIES AND COMMITMENTS
With respect to the matters described below under the headings Federal Securities Class
Actions, Shareholder Derivative Lawsuits and Other Proceedings, no liabilities or insurance
recoveries have been reflected in the consolidated financial statements as of July 31, 2008 as
these amounts are not probable or estimable.
Federal Securities Class Actions:
Four putative class action lawsuits were filed against the Company and certain members of its
management team alleging violations of the federal securities laws relating to the Companys
understatement of certain of its U.S. income tax payments and of its provision for income taxes in
certain prior periods as described in Note 2, Audit Committee Inquiry and Restatement to the
consolidated financial statements included in the 2007 Form 10-K. These lawsuits were filed between
August 14, 2007 and October 11, 2007 in the United States District Court for the Eastern District
of New York. By Order dated May 28, 2008, the Court consolidated the cases under the caption In re
Pall Corp, No. 07-CV-3359 (E.D.N.Y.) (JS) (ARL), appointed a lead plaintiff and ordered that the
lead plaintiff file a consolidated amended complaint. The lead plaintiff filed its consolidated
amended complaint on August 4, 2008. The lead plaintiff seeks to act as representative for a class
consisting of purchasers of the Companys stock between April 20, 2007, and August 2, 2007,
inclusive. The consolidated amended complaint names the Company, Eric Krasnoff and Lisa McDermott
as defendants and alleges violations of Section 10(b) and 20(a) of the Exchange Act, as amended,
and Rule 10b-5 promulgated by the Securities and Exchange Commission. It alleges that the
defendants violated these provisions of the federal securities laws by issuing materially false and
misleading public statements about the Companys financial results and financial statements,
including the Companys income tax liability, effective tax rate, internal controls and accounting
practices. The plaintiffs seek unspecified compensatory damages, costs and expenses. The Company
moved to dismiss the consolidated amended complaint on September 19, 2008.
Shareholder
Derivative Lawsuits:
On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme
Court, Nassau County relating to the tax matter described above. These actions purport to bring
claims on behalf of the Company based on allegations that certain current and former directors and
officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform
themselves about the Companys internal controls and financial reporting systems and procedures. In
addition, plaintiffs allege that certain officers of the Company were unjustly enriched as a result
of the Companys inaccurate financial results over fiscal years 1999-2006 and the first three
quarters of fiscal year 2007. The complaints seek unspecified compensatory damages on behalf of
Pall Corporation, disgorgement of defendants salaries, bonuses, stock grants and stock options,
equitable relief and costs and expenses. The Company, acting in its capacity as nominal defendant,
moved to dismiss the complaints for failure to make a demand upon the Companys board of directors,
which motions were granted on April 30 and May 2, 2008.
78
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
On September 19, 2008, the same two plaintiffs filed a derivative lawsuit in New York Supreme
Court, Nassau County, which was served on the Company on September 26, 2008. This action purports
to bring claims on behalf of the Company based on allegations that certain current and former
directors and officers of the Company breached their fiduciary duties and were unjustly enriched in
connection with the tax matter. In addition, the plaintiffs allege that the Boards refusal of
their demand to commence an action against the defendants was not made in good faith.
Other Proceedings:
The SEC and U.S. Attorneys Office for the Eastern District of New York are conducting
investigations in connection with the tax matter described above. The Company is cooperating with
these investigations.
Environmental Matters:
Certain facilities of the Company are involved in environmental proceedings. The most
significant matter pertains to the Companys subsidiary, Gelman Sciences Inc. (Gelman), which
constitutes the majority of the $14,749 and $18,127 of accruals in the Companys Consolidated
Balance Sheets at July 31, 2008, and July 31, 2007, respectively. The Company recorded charges of
$1,275 and $3,384 in fiscal years 2008 and 2007, respectively, related to environmental matters.
The increases recorded to the environmental liabilities represent managements best estimate of the
cost to be incurred to perform remediation. The estimates are based upon the feasibility of the use
of certain remediation technologies and processes as well as the facts known to management at the
time the estimates are made. (Refer to Note 1, Accounting Policies and Related Matters).
In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (the
Court) by the State of Michigan (the State) against Gelman Sciences Inc. (Gelman), a
subsidiary acquired by the Company in February 1997. The action sought to compel Gelman to
investigate and remediate contamination near Gelmans Ann Arbor facility and requested
reimbursement of costs the State had expended in investigating the contamination, which the State
alleged was caused by Gelmans disposal of waste water from its manufacturing process. Pursuant to
a consent judgment entered into by Gelman and the State in October 1992 (amended September 1996 and
October 1999) (the Consent Judgment), which resolved that litigation, Gelman is remediating the
contamination without admitting wrongdoing. In February 2000, the State Assistant Attorney General
filed a Motion to Enforce Consent Judgment in the Court seeking approximately $4,900 in stipulated
penalties for the alleged violations of the Consent Judgment and additional injunctive relief.
Gelman disputed these assertions. Following an evidentiary hearing in July 2000, the Court took the
matter of penalties under advisement. The Court issued a Remediation Enforcement Order (the
REO) requiring Gelman to submit and implement a detailed plan that will reduce the contamination
to acceptable levels within five years. Gelmans plan has been approved by both the Court and the
State. Although groundwater concentrations remain above acceptable levels in much of the affected
area, the Court has expressed its satisfaction with Gelmans progress during hearings both before
and after the five-year period expired. Neither the State nor the Court has sought or suggested
that Gelman should be penalized based on the continued presence of groundwater contamination at the
site.
In February 2004, the Court instructed Gelman to submit its Final Feasibility Study describing
how it intends to address an area of groundwater contamination not addressed by the previously
approved plan. Gelman has submitted its Feasibility Study as instructed. The State also submitted
its plan for remediating this area of contamination to the Court. On December 17, 2004, the Court
issued its Order and Opinion Regarding Remediation and Contamination of the Unit E Aquifer (the
Order) to address an area of groundwater contamination not addressed in the previously approved
plan. Gelman is now in the process of implementing the requirements of the Order.
In correspondence dated June 5, 2001, the State asserted that stipulated penalties in the
amount of $142 were owed for a separate alleged violation of the Consent Judgment. The Court found
that a substantial basis for Gelmans position existed and again took the States request under
advisement, pending the results of certain groundwater monitoring data. That data has been
submitted to the Court, but no ruling has been issued.
On August 9, 2001, the State made a written demand for reimbursement of $227 it has allegedly
incurred for groundwater monitoring. On October 23, 2006, the State made another written demand for
reimbursement of these costs, which now total $494, with interest. In February 2007, the Company
met with the State to discuss whether the State would be interested in a proposal for a global
settlement to include, among other matters, the claim for past monitoring costs ($494). Gelman is
engaged in discussion with the State with regard to this demand, however, Gelman considers this
claim barred by the Consent Judgment.
79
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
By letter dated June 15, 2007, the Michigan Department of Environmental Quality (DEQ)
claimed Gelman was in violation of the Consent Judgment and related work plans due to its failure
to operate a groundwater extraction well in the Evergreen Subdivision at the approved minimum purge
rate. The DEQ sought to assess stipulated penalties. Gelman filed a Petition for Dispute Resolution
with the court on July 6, 2007 contesting these penalties. Prior to the hearing on Gelmans
petition, the parties met and the DEQ agreed to waive these penalties in exchange for Gelmans
agreement to perform additional investigations in the area. The Court entered a Stipulated Order to
this effect on August 7, 2007. Since then, Gelman has installed several monitoring wells requested
by the State. Representatives of Gelman and the State met on December 10, 2007 to discuss the data
obtained from these wells and to plan further investigative activities. These discussions are
ongoing. On April 15, 2008, Gelman submitted two reports summarizing the results of the
investigation to date. Gelman also submitted a capture zone analysis that confirmed that Gelman
was achieving the cleanup objective for the Evergreen Subdivision system. On June 23, 2008, the
State provided its response to these reports. The response also addressed outstanding issues
regarding several other areas of the site. In its response, the State asked the Company to
undertake additional investigation in the Evergreen Subdivision area and in other areas of the site
to more fully delineate the extent of contamination. The State also asked the Company to capture
additional contaminated groundwater in the Wagner Road area, near the Gelman property, unless the
Company can show that it is not feasible to do so. Gelman proposed to the DEQ several modifications
to the Consent Judgment on August 1, 2008 and met with the DEQ to discuss these modifications (and
other outstanding issues) on September 15, 2008. The parties agreed that Gelman would prepare and
submit to the DEQ an outline for modifications to the existing Consent Judgment (and Administrative
Orders) by October 15, 2008 and that the parties would meet thereafter to discuss.
In the opinion of management, the Company is in substantial compliance with applicable
environmental laws and its accruals for environmental remediation are adequate at this time.
Because regulatory standards under environmental laws are becoming increasingly stringent, there
can be no assurance that future developments, additional information and experience gained will not
cause the Company to incur material environmental liabilities or costs beyond those accrued in its
consolidated financial statements.
Other Commitments and Contingencies:
The Company and its subsidiaries are subject to certain other legal actions that arise in the
normal course of business. It is managements opinion that these other actions will not have a
material effect on the Companys financial position.
The Company warrants its products against defect in design, materials and workmanship over
various time periods. Warranty costs are recorded based upon experience. The warranty accrual as of
July 31, 2008 and July 31, 2007 is immaterial to the financial position of the Company as is the
change in the accrual for fiscal year 2008 to the Companys consolidated results of operations,
cash flows and financial position.
As of July 31, 2008, the Company had surety bonds outstanding relating primarily to its
long-term contracts with governmental agencies of approximately $172,826.
The Company and its subsidiaries lease office and warehouse space, automobiles, computers and
office equipment. Rent expense for all operating leases amounted to approximately $30,818 in 2008,
$25,664 in 2007 and $24,835 in 2006. Future minimum rental commitments at July 31, 2008, for all
non-cancelable operating leases with initial terms exceeding one year are $22,390 in 2009; $14,749
in 2010; $8,727 in 2011; $5,001 in 2012, $2,691 in 2013 and $5,235 thereafter.
The Company and its subsidiaries have various non-cancelable purchase commitments for goods or
services with various vendors that have terms in excess of one year. Future purchase commitments at
July 31, 2008, for the aforementioned purchase commitments are
$105,244 in 2009; $8,443 in 2010;
$927 in 2011, $406 in 2012 and $406 in 2013 and $3,241 thereafter.
The Company has employment agreements with its executive officers, which vary in length from
one to two years. Such agreements, which have been revised from time to time, provide for minimum
salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses that
are payable if specified management goals are attained as discussed in Note 15, Incentive
Compensation Plan. The aggregate commitment for future salaries at July 31, 2008, excluding
bonuses, was approximately $13,003.
80
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
NOTE 14 COMMON STOCK
Shareholder Rights Plan
In 1989, the board of directors adopted, and the Companys shareholders approved, a
Shareholder Rights Plan. Under the Plan, as amended on April 20, 1999, one right is attached to
each outstanding share of the Companys common stock. Each right, when it becomes exercisable, will
entitle the registered holder to purchase one share of the Companys common stock at an initial
exercise price of $80 per share, subject to adjustment in certain events. The rights will become
exercisable and will trade separately from the common stock (1) ten days after any person or group
acquires 20% or more of the Companys outstanding common stock (an Acquiring Person), or (2) ten
business days after any person or group commences or announces a tender offer for 20% or more of
the outstanding common stock. If any person or group becomes an Acquiring Person, each holder of a
right, other than rights owned by the Acquiring Person, would thereafter be entitled, upon exercise
of the right at the exercise price, to receive a number of shares of common stock of the Company
having a market value at that time of twice the exercise price of the right. Alternatively, the
board of directors could exchange the rights not owned by the Acquiring Person for common stock at
an exchange ratio of one share of common stock per right. In addition, if the Company is acquired
in a merger or other business combination, or 50% or more of its consolidated assets or earning
power are sold, each holder of a right would thereafter be entitled, upon exercise of the right at
the exercise price, to receive a number of shares of the most powerful voting capital stock of the
acquiring company, which at the time of the business combination or sale had a market value of
twice the exercise price of the right.
The rights will expire on December 1, 2009, unless earlier redeemed. The rights are redeemable
by the board of directors for one-third of a cent per right at any time until a person or group
becomes an Acquiring Person.
Stock Repurchase Programs
On October 14, 2004, the Companys board of directors authorized the expenditure of up to
$200,000 for the repurchase of shares of the Companys common stock. On November 15, 2006, the
board of directors authorized an expenditure of $250,000 to repurchase shares. The Companys shares
may be purchased over time, as market and business conditions warrant. There is no time restriction
on this authorization. Total repurchases in fiscal year 2008 were 4,056 shares at an aggregate cost
of $148,850 with an average price per share of $36.70. The aggregate cost of repurchases in fiscal
years 2007 and 2006 was $61,795 (1,586 shares at an average price per share of $38.98) and $100,727
(3,556 shares at an average price per share of $28.33), respectively. Under the current stock
repurchase programs, $199,382 remains to be expended. Repurchased shares are held in treasury for
use in connection with the Companys stock plans and for general corporate purposes.
Stock Plans
The Company currently has four stock-based employee compensation plans which are described
more fully below under the captions Stock Purchase Plans and Stock Option and Restricted Stock Unit
Plans. The detailed components of stock-based compensation expense recorded in the Consolidated
Statements of Earnings for the years ended July 31, 2008, July 31, 2007 and July 31, 2006 are
illustrated in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008 |
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
Stock options |
|
$ |
3,092 |
|
|
$ |
4,034 |
|
|
$ |
6,019 |
|
Restricted stock units |
|
|
6,609 |
|
|
|
4,881 |
|
|
|
2,347 |
|
Employee stock purchase plan (ESPP) |
|
|
3,957 |
|
|
|
2,955 |
|
|
|
2,180 |
|
Management stock purchase plan (MSPP) |
|
|
2,401 |
|
|
|
2,252 |
|
|
|
1,319 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,059 |
|
|
$ |
14,122 |
|
|
$ |
11,865 |
|
|
|
|
|
|
|
|
|
|
|
81
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table illustrates the income tax effects related to stock-based compensation for
the fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Excess tax benefit in cash flows from
financing activities |
|
$ |
1,802 |
|
|
$ |
7,929 |
|
|
$ |
1,937 |
|
Tax benefit recognized related to
total stock-based compensation expense |
|
|
4,710 |
|
|
|
4,728 |
|
|
|
2,042 |
|
Actual tax benefit realized for tax
deductions
from stock-based
payment arrangements |
|
|
3,738 |
|
|
|
9,965 |
|
|
|
4,153 |
|
The following weighted average assumptions were used in estimating the fair value of stock
options and ESPP shares granted during the fiscal years using a Black-Scholes-Merton option-pricing formula:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date |
|
$ |
8.29 |
|
|
$ |
10.03 |
|
|
$ |
7.20 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
1.7 |
% |
|
|
1.8 |
% |
|
|
1.9 |
% |
Expected volatility |
|
|
24.9 |
% |
|
|
25.6 |
% |
|
|
26.7 |
% |
Expected life (years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Risk-free interest rate |
|
|
2.9 |
% |
|
|
4.8 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
ESPP Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date |
|
$ |
9.14 |
|
|
$ |
7.77 |
|
|
$ |
5.85 |
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
1.3 |
% |
|
|
1.5 |
% |
|
|
1.5 |
% |
Expected volatility |
|
|
33.7 |
% |
|
|
21.0 |
% |
|
|
19.1 |
% |
Expected life (years) |
|
1/2 year |
|
1/2 year |
|
1/2 year |
Risk-free interest rate |
|
|
2.7 |
% |
|
|
5.1 |
% |
|
|
4.6 |
% |
The Company has placed exclusive reliance on historical volatility in its estimate of expected
volatility. The Company used a sequential period of historical data equal to the expected term (or
expected life) of the options using a simple average calculation based upon the daily closing
prices of the aforementioned period.
The expected life (years) represents the period of time for which the options granted are
expected to be outstanding. This estimate was derived from historical share option exercise
experience, which management believes provides the best estimate of the expected term.
The following paragraphs describe each of the aforementioned stock-based compensation plans in
detail:
82
PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Stock Purchase Plans
During fiscal year 2000, the Companys shareholders approved two stock purchase plans, the
MSPP and the ESPP. Participation in the MSPP is limited to certain executives as designated by the
compensation committee of the board of directors, which also established common stock ownership
targets for participants. Participation in the ESPP is available to all employees except those that
are included in the MSPP.
The purpose of the MSPP is to encourage key employees of the Company to increase their
ownership of shares of the Companys common stock by providing such employees with an opportunity
to elect to have portions of their total annual compensation paid in the form of restricted units,
to make cash purchases of restricted units and to earn additional matching restricted units which
vest over a three year period for matches prior to August 1, 2003 and vest over four years for
matches made thereafter. Such restricted units aggregated 838 and 789 as of July 31, 2008 and July
31, 2007, respectively. As of July 31, 2008, there was $5,876 of total unrecognized compensation
cost related to nonvested restricted stock units granted under the MSPP, which is expected to be
recognized over a weighted-average period of 2.8 years.
The following is a summary of MSPP activity during the fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Deferred compensation and cash
contributions |
|
$ |
4,034 |
|
|
$ |
3,259 |
|
|
$ |
3,501 |
|
Fair value of restricted stock units vested |
|
$ |
1,172 |
|
|
$ |
306 |
|
|
$ |
565 |
|
Vested units distributed |
|
|
159 |
|
|
|
141 |
|
|
|
68 |
|
The ESPP enables participants to purchase shares of the Companys common stock through payroll
deductions at a price equal to 85% of the lower of the market price at the beginning or end of each
semi-annual stock purchase period. The semi-annual offering periods end in April and October. For
the years ended July 31, 2008, July 31, 2007 and July 31, 2006, the Company issued 462, 498 and 472
shares at an average price of $31.75, $26.37 and $22.10, respectively.
Both plans provide for accelerated vesting if there is a change in control (as defined in the
plans). All of the above shares were issued from treasury sto